Market Overview
The Property market has always been cyclical in nature, the difference over the years being the length and depth of the peaks and troughs. We indicated last year that we had been experiencing weak tenant demand in the office sector. This continued into 2002. Against this challenging background the team delivered an excellent performance. This reflects the focus over recent years on diversifying the asset portfolio, prudent risk management and effective forward-selling developments to secure profit.

The Housing market has recently been the focus of unprecedented levels of commentary from both industry insiders and external observers. In our opinion the fundamentals of the industry are still positive - an active investment market; sensible affordability ratios; low unemployment levels and historically low and stable interest rates. At the same time changes in lifestyle trends have increased the number of new households being formed and therefore the demand for housing, whilst new housing starts are at record low levels. With all important consumer confidence levels remaining high, we experienced a very favourable market environment throughout 2002. Our Housing business positively responded to this, returning an excellent performance, with unit completions, turnover and profits growing by, 13%, 19% and 38% respectively.

Construction was one of the few favoured sectors of the economy in 2002, driven substantially by the government's public spending pronouncements and continued endorsement of Public Private Partnerships (PPP). However, we also experienced strong demand from our retail and developer customers, specifically those involved in inner city regeneration. Against this background we returned a commendable performance, with operating profits up 24%.

Funding
The Group has £225m of unsecured but committed banking facilities in place until the spring of 2006. In addition, we have separate non-recourse facilities tailored to specific assets or joint ventures. We value our banking relationships highly and have recently introduced our banks as equity as well as debt providers to two major property transactions, highlighting the strength of those partnerships.

People
We were delighted to welcome two new board members during 2002: Tim Hough as Chief Executive of Miller Homes and Andrew Huntley as Non-executive Director. Tim's previous experience as Group Operations Director of a major housebuilder and Andrew's as Chairman of Insignia Richard Ellis will be enormously valuable to the Board. I would also like to thank Jack Mather, who retired from the Board during the year, for his valued contribution over 10 years with the Group and wish him well for his retirement.

We continue to actively promote wider share ownership. 2002 saw the maturity of our first Savings Related Share Option Scheme and we were delighted to welcome many new employee shareholders as a result. 8% of the company's shares are now either owned or held under option by employees. The Board thanks all employees for their contribution to the Group's continued success.

Pensions
Pensions have been the focus of considerable debate in the past year, mainly as a consequence of the steep decline in equity markets. The Group has two pension schemes - a defined contribution scheme and a defined benefit scheme, which was closed to new entrants in 1997.

The defined benefit scheme was revalued under the Minimum Funding Rate (MFR) rules in January 2003. The scheme was in deficit by approximately £9m. Consequently the company has set in place a revised Schedule of Contributions to restore the MFR level to 100% by 2007. The Board is currently reviewing the Government's green paper on pensions and will make representations in due course on its proposals.

Corporate Governance
The Board has always placed sound corporate governance at the top of its agenda. We have embraced the various recommendations proposed by Cadbury, Greenbury and Turnbull over recent years, with management implementing detailed action plans but more importantly changing culture to manage risk more vigorously.

We are currently digesting the Higgs report and will respond appropriately, but our initial view is that we do not envisage major changes to either the Board structure or governance processes which we have in place.

Prospects
In the short-term, we expect little change in our trading environment. Housing and Construction Services have a very positive supply/demand profile and our prospects in Property remain strong in spite of sector-wide difficulties.

Looking further ahead, the major factor that could dent consumer and investor confidence is prolonged uncertainty in the Gulf. We all hope there is a speedy and lasting resolution.

Bob Speirs Chairman