Investment Adviser’s Report

Investment portfolio

Despite ongoing concerns in the commercial and retail property sectors, REO’s investment portfolio continues to perform strongly, as evidenced by high occupancy rates remaining of 95% and only 4% of rent roll in arrears, resulting in an annualised rent roll of € 40.1 million on the irish investment portfolio.

Rent weighted average lease length is approximately 12 years. Property income in the twelve months ended 28 February 2011 was £34 million, reduced from £44 million for the fourteen months ended 28 February 2010, due to a combination of factors including reduced reporting period, lease restructuring, impact of upward rent reviews retrospectively applied in previous period and negative currency translation impact. By focussing on high occupancy levels and quality tenants in locations and formats with strong occupier appeal, the Group continues to pro-actively manage its investment portfolio, with no material defaults to date. This combination of prime office/retail locations and high quality, diversified tenants such as Vodafone, Merrill Lynch, KPMG, Tullow Oil plc and Marks & Spencer, has ensured that the Group’s investment portfolio continues to post strong operational results.

As noted in the Chairman’s Statement, the Group successfully completed a rent review, determined at arbitration, with Marks & Spencer (Patrick Street, Cork), resulting in a significant increase on the previous rent, with the new rent being effective from July 2009.

The increased rental space taken by Tullow Oil plc in the Central Park development in Leopardstown, Dublin, which represents a doubling in size of the existing rental space currently occupied by the tenant in the same development, is further evidence of the Group’s ability to secure quality tenants in prime locations.

DEVELOPMENT PORTFOLIO

Battersea Power Station

As outlined in the Chairman’s Statement, the Group has made significant progress towards securing planning permission on the above project, with construction of Phase 1 of the development scheduled to commence in 2012, with completion in 2016.

The process to introduce an equity partner(s) into the new Battersea Power Station Shareholder Vehicle Limited, BPSSV, is approaching finalisation of a shortlist of potential investors, following a high level of interest generated by the global investment roadshow.

The development, which represents the largest ever scheme undertaken in Central London, will act as a catalyst for the regeneration of the Nine Elms Opportunity Area and is expected to generate approximately 15,000 new jobs and training opportunities for the area. The scheme will also include a new underground station on the proposed extension of the Northern Line from Kennington to Nine Elms and Battersea.

IRISH DEVELOPMENT PORTFOLIO

Progress within the irish development portfolio in the period includes:

Montevetro

REO’s development of the 15-storey landmark building, which is Dublin’s tallest commercial office building, commenced in March 2008 and completed in January 2011. Discussions between REO’s investment adviser, Treasury holdings, and Google began in early 2010 about Google taking a lease of the building but subsequently developed into discussions for an outright sale.

Initial exchange of contracts took place on 17 February 2011 with completion of the sale, for a price of £85.2 million, which was satisfied in cash, in April 2011.

Central Park

As noted above, the FTSE 100 index listed, international oil and gas exploration company, Tullow Oil plc, is to lease a total of 48,000 sqft in Number One, Central Park in Leopardstown, Dublin, which is a state of the art office block.

Central Park, which is REO’s prime suburban development, is home to a range of blue chip clients including Vodafone, Tullow Oil plc, Ulster Bank (Royal Bank of Scotland), Volkswagen Bank, Lease Plan and Merrill Lynch. The opening of the LUAS Green line extension in October 2010 improves access to the city centre, further enhancing the location’s importance in providing high quality commercial accommodation for blue chip corporates.

Despite the absence of current development projects, REO continues to actively pursue appropriate planning permissions on various projects in ireland, as evidenced by the recent receipt of local authority planning for a 232,000 sqft private hospital and rehabilitation facility, along with 260 car park spaces, in Sligo, which represents Phase 1 of this development.

Sustainability

Through its role as investment adviser and portfolio manager for REO, Treasury holdings, which has been a carbon neutral company since 2007, promotes environmental protection and sustainability across all aspects of REO’s property portfolio via the implementation and use of environmentally friendly materials and renewable energy initiatives.

Many REO developments, such as Montevetro and Central Park, have set very high environmental standards and the provision of sustainable buildings, such as these, offer competitive advantages to corporate tenants through lower operating costs and better indoor environmental quality, thereby allowing tenants to demonstrate progress towards corporate environmental objectives. The Battersea Power Station development will lead the way in delivering a highly sustainable development, through the creation of a mixed use community, new public transport provided by the Northern Line Extension and ground breaking environmental measures.

The project includes a CChP energy centre generating 30MW of electricity which, together with other efficiency measures, will enable the Power Station to become zero carbon and the rest of the development to be low carbon, saving approximately 65% of CO emissions across the entire site.

VALUATIONS

The value of the portfolio as at 28 February 2011 amounted to £1,004 million, a reported decrease of 8.5% from the 28 February 2010 valuation of £1,097 million.

Valuation Methodology

Investment properties and investment properties under development are stated at fair value in accordance with GAAP at 28 February 2011 and have been valued by independent property valuers.

Irish Investment Properties: The value of irish investment properties has declined on average by 15.2% in the twelve months to 28 February 2011, which is broadly consistent with decreases in capital values as disclosed by SCS iPD index in the intervening period.

Irish development properties: The value of irish properties under development, which are classified as sites in the course of development, has decreased on average by 35.9% in the twelve months to 28 February 2011. Market sentiment continues to be negatively weighted in the development sector during the period under review due to high levels of uncertainty as the market waits to assess the operational impact of NAMA, together with the absence of liquidity in the banking sector.

UK properties: The value of the UK property portfolio has increased by 16.4% in the 12 months to 28 February 2011. This is primarily due to significant progress made towards securing planning permission on the Battersea Power Station development.

Pending the introduction of a third party investor into the newly formed Battersea Power Station Shareholder vehicle, construction of Phase 1 of the development is scheduled to commence in 2012, with completion in 2016.

FINANCIAL REVIEW

Valuations & net asset value (“nav”) As noted above, the value of the portfolio as at 28 February 2011 amounted to £1,004 million, a reported decrease of 8.5% since 28 February 2010.

The deficit on the consolidated shareholders’ funds at 28 February 2011 is £801 million (28 February 2010: £722 million deficit) – the effect of the recently completed balance sheet restructuring will see this deficit reduce to £559 million. The consolidated net deficit of the Group under the EPRA guidelines is £718 million at 28 February 2011 (28 February 2010 EPRA net deficit: £595 million).

Diluted EPRA deficit per share was -215.1p as at 28 February 2011, representing an increase in the deficit from -178.2p at 28 February 2010.

Income statement

Property income amounted to £34 million in the twelve months to 28 February 2011, representing a decrease from £44 million in the prior fourteen month period primarily due to reduced reporting period, lease restructuring, impact of upward rent reviews retrospectively applied in previous period and negative currency translation impact. After valuation losses and operating expenses, the reported operating loss was £45 million (14 months ended 28 February 2010: £816 million).

Net financial expenses were £46 million in the year (14 months ended 28 February 2010: £112 million), whilst accounting profits on disposal of investments in China Real Estate Opportunities plc and the Montevetro development property were £26 million and £31 million respectively, having recorded impairment provisions in respect of both items in previous periods.

This has resulted in a REO loss after taxation for the period of £77 million (14 months ended 28 February 2010: £828 million), including an income tax credit of £14 million.

Administrative expenses in the year to 28 February 2011 have increased significantly in comparison to the prior period due principally to professional fees incurred in respect of the balance sheet restructuring.

Cash

As at 28 February 2011, the Group had cash, cash equivalents and restricted cash of £31 million (28 February 2010: £39 million).

Debt & Gearing

Overall debt level, which includes OLNs, CULS and ZDPs, amounted to £1,733 million at 28 February 2011. Bank loans amounting to £1,029 million have matured or will mature during the next twelve months. however, the successful completion of the recent balance sheet restructuring, which resulted in the equitisation of debt owing to the holders of the CULS and the ZDPs into shares in REO and the newly formed Battersea shareholder vehicle, BPSSV, will reduce financial indebtedness to £1,499 million. The Group continues to work closely with other lenders, which exist outside NAMA’s remit, to renew debt facilities where required.

GOING CONCERN

The Group’s future operating performance will be affected by general economic, financial and business conditions, many of which remain beyond the Group’s control.

At 28 February 2011, the Group’s borrowings totalled £1.73 billion and in addition there were interest and finance accruals of £67.7 million. At that date, the Group had an investment and development portfolio which it valued at £1 billion, together with cash and cash equivalents of £5.7 million, and restricted cash of £25.8 million. The deficit on shareholders’ funds was £801 million. At 28 February 2011, the Group had aggregate bank loans of £1.03 billion classified as current liabilities.

In addition, the Group had obligations of £380 million due to the holders of its CULS, ZDPs and the OLNs, all of which were due to mature in May 2011. The liabilities due to holders of the CULS and ZDPs amounted to £100.9 million and £133.1 million respectively, with a principal amount of £146.3 million due to the holder of the OLNs at 28 February 2011. interest payments of £7.6 million and £17 million due at 28 February 2011 to the holders of the CULS and OLNs respectively were not made at this date. Based on its current financial position, and as previously announced, the Group would have been unable to repay those instruments on their maturity.

However, as of 12 May 2011, the Group has successfully completed a financial restructuring of these liabilities which also enables the transfer of the Battersea Power Station asset into the newly formed entity, BPSSV. The terms of the financial restructuring include the deferral of all principal and interest payments due on the OLNs until 31 August 2011 and the novation of those liabilities into BPSSV. The restructuring involves an equitisation of the CULS and ZDPs into equity in BPSSV and REO.

The Group has also renegotiated the loan facilities relating to Battersea Power Station with both Lloyds Banking Group (previously Bank of Scotland) and NAMA (previously Bank of ireland), extending the existing facility to 31 August 2011. Currently, these facilities can be called on demand.

The Group submitted a comprehensive business plan in May 2010 for review by NAMA. The initial evaluation process resulted in a signed Memorandum of Understanding (“MOU”) in December 2010, the terms of which are non-binding. The terms include the consolidation and renewal of loan facilities and the provision of working capital. NAMA will monitor the Group’s subsequent performance to ensure that it adheres to targets contained in the MOU and, subject to further negotiations, binding facility agreements are expected to be entered into in the near future.

The key assumptions made in preparing the Group’s cashflow for the period to 22 June 2012 include:

• The completion of binding facility agreements with NAMA based on signed MOU in the near future to address:

(a) interest payments

(b) renewal by NAMA of bank facilities in the amount of £829 million

(c) the provision by NAMA of working capital facilities

(d) the provision by NAMA of financial support to cover certain operating cash requirements

• The renewal by non-NAMA banks of facilities in the amount of £525 million on broadly similar terms.

• Planning permission for the proposed development of Battersea Power Station will be granted in the near future. Resolutions to grant planning permission by Wandsworth Council, the Mayor of London and the Secretary of State for Communities and Local Government have been received, with final grant of planning permission as represented by Section 106 agreement anticipated in the near future.

• The process undertaken to identify and agree terms with an equity partner(s) is approaching finalisation of a shortlist of potential investors which, when complete, will lead to the introduction of an equity partner(s) on the Battersea development providing all project financing and repayment of certain liabilities.

The Group may also investigate the possibility of raising further capital after its debt facilities have been renegotiated and its interest in Battersea Power Station has been restructured.

Based on the Group’s current cashflow and the key assumptions noted above, the Board believes that the Group will have sufficient cash and cash equivalents to meet its liquidity requirements for at least twelve months from the date of approval of this report.

The Directors of the Company have concluded that the above factors represent material uncertainties. Failure to achieve the above assumptions and objectives could cast significant doubt on the Group’s ability to continue as a going concern and it may therefore be unable to realise its assets and discharge its liabilities in the normal course of business.

However, having discussed the assumptions and basis of preparation supporting the Group’s cash flow projections, together with the advanced status of negotiations with the Group’s key lenders, along with the progress made in restructuring of the Group’s Balance Sheet and the significant progress made towards securing planning permission on Battersea Power Station, the Directors of the Company have a reasonable expectation that the Group will be able to meet its liabilities as they fall due for the foreseeable future.

On this basis, the Directors consider it appropriate to prepare the financial statements on a going concern basis. No adjustment which would result from a change in the going concern basis of preparation has been included in the financial statements.