Irish Economic Overview
The Irish economy experienced another year of very strong growth in 2006. Official data from the ESRI shows that real GNP expanded by an estimated 6.2% in 2006, compared to 5.3% the previous year. In real GDP terms the economy grew by 5.8%, compared to 5.5% in 2005.
Retail spending remained very robust during the year with the most recent data from the Central Statistics Office showing an annual average increase of 6.2% in the volume of sales during the 12 month period. The first Special Savings Incentive Account (SSIA), a state sponsored savings scheme , funds were released in May last year, with two thirds of SSIA’s maturing in 2007. This is likely to provide a further boost to the market. Some €15 billion of funds will be maturing between May 2006 and April 2007, which is equivalent to 8.5% of GDP.
Increases in housing costs (due to higher mortgage payments) are putting upward pressure on inflation. The annual rate of inflation increased during the year to reach 4.9% in December. This is the highest level since March 2003.
The results of the Census 2006, which were released during the summer, highlighted significant population growth between 2002 and 2006. The preliminary total for the population of the State as of April 2006 was 4.23 million persons, compared with 3.92 million persons in 2002. This represents an increase of 7.9% in four years. The population is projected to grow to 4.5 million by 2010 and to 5 million by 2020. Such
population rises have significant implications for all aspects of the property market, particularly the housing market.
The Irish labour market is still performing strongly. Employment growth remained high during the year with the total number of persons employed exceeding the 2 million mark for the first time. With the economy close to full employment, the unemployment rate remains one of the lowest in the EU at approximately 4.5%. Foreign workers continue to make up a significant portion of the Irish labour force. This growth continues to be led particularly by the construction industry but the financial services and health sectors also continue to grow strongly.
The ECB increased rates by a further 0.25% to 3.5% in December 2006 (sixth consecutive increase). This increase means that the ECB has increased official interest rates by 1.5% in total since December 2005. Despite this, the current level of interest rates still remains relatively low in historic terms. The market is expecting rates to rise by another 0.5% during 2007, with rates expected to stay on hold thereafter.

Irish Property Markets
The Irish property market continues to perform exceptionally well with the SCS/IPD Index producing a total market return of 27.2% over the 12 months to December 2006. This is the net result of 4.4% income return and 21.9% capital growth. The office market recovery is now firmly established, which is reflected in the Index with a return of 27.6% over the 12 months to December 2006.

Irish Occupational Markets
(a) Office Market
An excellent final quarter performance was experienced in the Dublin office market this year. A return of 4.7% was recorded for the quarter. In comparison to the other property sectors, 2006 was the first year that the office sector outperformed the retail sector, with total returns of 27.6%. The capital value element of the Index was composed of 3.6% in the quarter, bringing the growth in capital values in the last 12 months to 21.7%.
Activity in the Dublin office market remained buoyant in the final quarter of the year with take-up reaching a robust 105,600 sq.m, according to DTZ. This is almost twice the level experienced in the previous quarter and is the highest ever recorded in a three month period. It is estimated that the quantity of accommodation taken up for the year reached an all time high of 243,900 sq.m, which is approximately 60% greater than the previous year. 46% of this space taken up during the year was located in the prime region of the city.
The pace of construction activity shows no sign of easing, with 331,700 sq.m of accommodation currently under construction, which is 33% greater than the same period last year. Additionally, almost a quarter of the space under construction was pre-let at the end of the year, with a further 12% under active negotiation. Just over a third of this accommodation under construction is located in the prime region of the city, where demand is strongest and as a result is unlikely to remain vacant in the long term.
The vacancy rate has fallen, with a rate of 14.6% recorded at the end of the quarter for the overall market (DTZ). This is the lowest rate in almost five years. The suburbs accounted for over half of all the available space. Interestingly, 28% of all available space was under active negotiation at the end of 2006, which if taken up could substantially reduce the vacancy rate further to 10.5%, which is not too far away from the market equilibrium rate of 7%.
Rents of between €590 and €645 per sq.m have been achieved in Dublin 2/4 and the Docklands, with tenant incentives declining significantly. As the vacancy rate declined, it is expected that prime rents will continue to increase, with rents in excess of €700 per sq.m expected to be achieved. Suburban schemes continue to vary considerably depending on location. Rents which lie at between €160 and €270 per sq m.
The demand is currently been driven by the professional and financial sectors, with the professional sector being the most active during the year, accounting for 36% of all office space taken up. According to the IPD Index, the equivalent yield in the office sector for the 12 months to December 2006 was 4.46%. However two recent office sales have returned very low initial yields of 2.75%
.
(b) Retail Market
The retail sector experienced another strong performance in 2006 with an impressive return of 26.7% over the year to December 2006, with a return 6.9% in the final quarter of the year. The strength of returns for retail property reflects very robust capital growth of 22.8% in the 12 month period, compared to 23.1% in the previous year. According to the IPD Index the equivalent yield in the retail sector for the 12 months to December 2006 was 3.38%. However there have been transactions on prime high streets at an all time low of 2.5%.
Retail spending remained very robust during the year, with the most recent data from the Central Statistics Office showing an annual average increase of 6.2% in the volume of sales during the 12 month period. This is compared to growth of 4.8% in 2005 and is the highest level experienced since 2000. Recent interest rate increases do not appear to be affecting sales activity and consumer demand has certainly been further fuelled in recent months by the maturing of the first SSIA saving accounts.
These impressive consumer statistics continue to encourage not only indigenous retailers to expand, but have encouraged a large number of international retailers to seek out opportunities to locate and expand across the country. This continues to escalate rental values and boost activity, particularly in high street locations and modern shopping centres. Planning permission was granted by Fingal County Council to develop a 30,000 sq.m IKEA store in Ballymun, Dublin 11. However this decision is subject to appeal to An Bord Pleanala.
Development activity in the retail sector continues, with approximately 265,000 sq.m of both shopping centre and retail park accommodation added to the market in the last 12 month period. This pace of development activity is set to continue, with approximately 430,000 sq.m of shopping centre and retail park space currently under construction, while planning permission has been granted for a further 585,000 sq.m of space.
With the improvement in the quality of retail accommodation in Ireland, the older retail offerings are coming under pressure to reinvent themselves to meet the raised expectations of the Irish consumer in this more competitive environment.

(c) Industrial Market
The Dublin industrial market continued to strengthen during the fourth quarter of 2006, recording a total return of 6.4% in the quarter.
The increased level of demand has seen the vacancy rate decline to 8.4% (DTZ), which compares favourably to 10.3% at the end of 2005. This rate is due to limited speculative development in the market over the last few years and the fact that older industrial buildings and land are being redeveloped for higher value uses. This reduction in supply levels has impacted positively on capital values and growth in rents.
The capital value element of the Index was composed of 4.9% in the fourth quarter, bringing the growth in capital values in the last 12 months to 18.1% (compared with 8.9% in the same period of 2005).
The Dublin Port Tunnel opened on the 22 December 2006. This is particularly significant for the industrial sector. This is likely to boost demand along the M1 and M50 motorways, fueling growth in both building and land values.

(d) Residential Market
Activity in the housing market remains positive, with strong growth in mortgage credit, house prices and house completions. According to Permanent TSB data, prices nationally rose by 0.1% in both November and December 2006. The annual rate of house price inflation was recorded at 11.8% at the end of the year.
The latest figures from the Central Statistics Office reveal that the total number of immigrants into Ireland reached 86,900 in the year to April 2006. The strength of this migration continues to underpin the demand for residential property. If it is assumed that a third of all immigrants either buy or rent a property, this would suggest a requirement for just under 30,000 units, equivalent to almost a third of all new properties being built during the period.
The ECB increased rates by a further 0.25% to 3.5% in December 2006. This latest increase means that the ECB has increased official interest rates by 1.5% in total since December 2005. The view is however that the Irish property market will continue to perform strongly on the back of positive economic conditions, in particular strong employment and favorable demographic trends including strong population growth, high
levels of immigration and falling household sizes.
2006 was a phenomenal year for the new homes market with the latest figures from the Department of the Environment revealing that a total of 93,419 residential units were completed during the 12 month period. This is equivalent to 22 units per thousand of the population and represents a 15% increase on the record high of 2005.

(e) Summary
The outlook for the retail sector for the year ahead is positive, supported by the continued strength of the Irish economy and growth in consumer expenditure. The further release of SSIA funds for the next number of months will provide a further boost to the market.
The office market looks set to repeat its strong performance of 2006 in the year ahead, with a number of very large occupier requirements in the market, especially in Dublin city centre.
For the residential market as a whole, house prices will continue to increase this year for both new and existing properties. Strong demand, particularly from first time buyers, continues following the amendments to the stamp duty rates last year, the introduction of 100% mortgages and the strength of immigration.

Treasury Holdings
Investment Adviser

The Directors present their report on the affairs of the Company, together with the audited financial statements for the year ended 31 December 2006.
Principal Activities and Business Review
The business of the Company is that of a public property company investing mainly in the Irish property market but also overseas. A review of the Company’s activities is given in the Chairman’s Statement and the Investment Adviser’s Report.

Status
The Company constitutes a collective investment fund, under the collective Investment Funds (Jersey) Law 1988 (as amended), and has been granted exempt status under Article 123A of the Income Tax (Jersey) Law 1961. The registered number is 79679.
Ordinary and Zero Dividend Preference shares and units of CULS are eligible for inclusion in a general PEP if acquired in the market using funds contained within the PEP. The Ordinary and Zero Dividend Preference shares and units of CULS are qualifying investments for the stocks and shares component of an ISA.

Results and Dividends
The financial results for the year ended 31 December 2006 are shown in the Consolidated Profit and Loss and Statement of Total Recognised Gains and Losses on pages 29 and 30 respectively.
An interim dividend of 1p per Ordinary share was paid on 3 November 2006 to shareholders on the register on 6 October 2006. Conditional on shareholder approval, a final dividend of 1.5p per Ordinary share will be paid on 6 July 2007 to shareholders on the register on 8 June 2007.
Extraordinary General Meeting (“EGM”) Shareholders approved all the resolutions proposed at the EGM held on 29 December 2006 concerning:
- the acquisition of Battersea Power Station, London for a consideration of £400 million to be satisfied in cash of £250 million on completion and the balance by the issue of the 6.324% secured loan notes 2011 to the seller. The cash element of the consideration will be financed by the Company’s
existing cash resources and from a new loan facility with the Bank of Scotland.
- the amendment of the Company’s articles of association by deleting the Article which requires the Company to comply with the investment restrictions from time to time applicable to property investment companies under the Listing Rules.

Conversion to Property Company
Since its launch the Company constituted a property investment company for the purposes of the Listing Rules and presented its financial statements in accordance with Statement of Recommended Practice: Financial Statements of Investment Trust Companies. Following the reclassification of the Company as a property company the financials for 2006 are presented in accordance with UK Generally Accepted Accounting Principles. The comparative financial statements have been presented
on a consistent basis.
As REO is no longer an investment company, Mr Barrett and Mr Leech will not be subject to annual re-election in order to comply with Chapter 15.2 of the UKLA Listing Rules.

Events Subsequent to the Year End
Details of subsequent events are set out in note 27 to the Financial Statements.

Aberdeen litigation
On 16 March 2007 the Company announced that it had reached a settlement with Aberdeen Asset Management (“Aberdeen”) in relation to all claims against Aberdeen arising from the launch of REO and the subsequent management by Aberdeen of REO’s income portfolio.
Details of the settlement of the claim are set out under note 27 (a) of the Financial Statements.
The Board intends to continue with related claims against UBS.

Directors
The Directors of the Company, all of whom served throughout the year, are shown with brief biographical details on page 13.
In accordance with the Articles of Association, Mr. Horney, Mr. Leech, Mr. Richardson and Mr. Jenkins will retire by rotation and, being eligible, offer themselves for re-election.
No Director has a service contract with the Company.
Mr Barrett is a director and 50% shareholder of Treasury Holdings (“Treasury”). Treasury has an agreement to provide investment advisory services in respect of the Global Property Portfolio and Irish Property Portfolio and to provide property management services in respect of the Irish properties to Castle Market Holdings Limited. The terms of these agreements in force during the year are disclosed in note 4 to the Financial Statements.
The Directors who held office at the year end and their beneficial interests in the Ordinary 1p shares, Zero Dividend Preference 1p shares and 7.5% Convertible Unsecured Loan Stock 2011 (“CULS”) at 31 December 2006 are shown below

Substantial Interests
The Board has been advised that the following shareholders owned 3% or more of the issued Ordinary share capital of the Company as at 28 February 2007.

1. See table and footnotes on previous page for additional information concerning these holdings.
Treasury Holdings holds more than 50% of the (enlarged) Ordinary share capital. Treasury Holdings and persons acting in concert with it are therefore in a position to increase their shareholdings in the Company without incurring an obligation under the Take-over Code to make a general offer to Ordinary shareholders.
On 11 April 2005, a substantial shareholder agreement was put in place between the Company and Treasury Holdings (“Treasury”) for the purposes of regulating the relationship between the Company and Treasury. Under the substantial shareholder agreement, the parties agreed that, for so long as Treasury and its associates exercise, or control the exercise of, 30% or more of the voting rights of the Company or are able to control the appointment of directors who are able to exercise a majority of votes at board meetings, Treasury will not (and will exercise such rights as it may have to procure that
its associates will not): (i) take any action which may result in the Company not being able to carry on its business independently of Treasury or its associates or (ii) enter into any transaction or relationship with the Company other than at arm’s length and on a normal commercial basis. In addition, the agreement contains an acknowledgement that both the Company and Treasury remain bound by pre-existing contractual arrangements concerning the management of conflicts of interest between them. This agreement shall continue in full force and effect for so long as Treasury and/or any of its associates continue to own or control Ordinary shares carrying in aggregate 30% or more of the voting rights in the Company and shall terminate if the ownership of the Ordinary shares and/or any of its associates falls below this level or the Ordinary shares cease permanently to be listed on the Official List of the UK Listing Authority.

Share buy-backs
The Company’s authority to make market purchases of up to 14.99% of its issued Ordinary shares was renewed on 20 June 2006. On the same date the authority to also make market purchases of all its outstanding Zero Dividend Preference (ZDP) shares, was also renewed. The Company will be seeking to renew both the Ordinary and ZDP authorities at this year’s AGM, notice of which is set out on pages 69 and 70. These authorities will only be exercised on terms that are in the interests of shareholders.

Directors’ Fees
Details of the Directors fees are given in note 5 on page 40.

Ordinary shares
During the year no CULS were converted into Ordinary shares.

Financial Statements
The Directors’ responsibilities regarding the financial statements and safeguarding of assets are set out on page 26.

Report of the Audit Committee
The Audit Committee is responsible to the Board for reviewing each aspect of the financial reporting process; the systems of internal control and management of financial risks, the audit process, relationships with external auditors, the Company’s processes for monitoring compliance with laws and regulations, its code of business conduct and for making recommendations to the Board.
The Company’s internal financial controls and risk management systems have been reviewed with the Investment Advisers against risk parameters approved by the Board.
The audit plan and timetable is drawn up and agreed with the Company’s Auditors in advance of the financial year end. At this stage, matters for audit focus are discussed and agreed. These matters are given particular attention during the audit process and, among other matters, are reported on by the Auditors in their report to the Committee. This report is considered by the Committee and discussed with the Auditors and the Investment Advisers prior to approving and signing the Financial Statements.
The Committee has reviewed the Financial Statements for the year ended 31 December 2006 with the Investment Advisers and Auditors at the conclusion of the audit process.
The Committee recommended approval by the Board of a group audit fee of £162,000. Non-audit work undertaken on behalf of the Company by the Auditors mainly comprised work in connection with the acquisition of Battersea Power Station in London, refinancing in relation to the bond deal and work on the Company’s taxation affairs. Details of these fees are shown in note 5 on page 40. The Committee has considered the independence of the Auditors.

Terms of appointment
The Company’s investment management and advisory agreements are considered annually by the Management Engagement Committee. The results of this formal review are advised to the Board. The Management Engagement Committee carried out the most recent review following the Company’s financial year end on 31 December 2006 and, on the basis of the Committee’s report, the Board is pleased to confirm that it is satisfied with the performance and current terms of appointment of Treasury Holdings and INVESCO Asset Management Limited.

Going Concern
After making enquiries, the Directors have a reasonable expectation that the Company has adequate resources to continue in operational existence for the foreseeable future. For this reason, they continue to adopt the going concern basis in preparing Financial Statements.

Creditor Payment Policy
The Company’s policy is to pay Stock Exchange trade creditors on dates of settlement and all other creditors are normally paid within 30 days or in accordance with contracted terms.