Introduction

Following your Company’s excellent achievement last year, I am very pleased to report that strong performance has continued for the first six months of this calendar year. As a result, net assets per ordinary share have effectively doubled in the last eighteen months to 30 June 2006.

In the six-month period ending 30 June 2006, net asset value per ordinary share increased from 72.9p to 94.4p, an uplift of over 29 per cent. The main drivers of this strong performance have been: the disposal of the Group’s interest in the Aldi Site at Sandyford, Co Dublin at a substantial profit and a significant increase in the value of the Company’s investment portfolio prompted in particular by tightening of yields in the Dublin office market, which accounts for more than 44 per cent. of REO’s Irish property portfolio.

The Board has decided to declare an interim dividend of 1p per ordinary share, payable on 3 November 2006 to shareholders on the register on 6 October 2006, with an ex-dividend date of 4 October 2006.

Further good news has emerged since the end of the period under review, with the grant of planning consent for the redevelopment of the Stillorgan Shopping Centre in Dublin, one of the Company’s major assets.

Against this background and mindful of the property development opportunities available to REO, the Board is examining the potential benefits of converting REO into a property company from its current status as an investment company.

Irish Property Portfolio

The first half of the year recorded strong growth in the value of the Irish property portfolio and has been the primary factor in the growth in the net asset value per share over the period. The total value of the portfolio, including interests in properties held in joint ventures and after the effect of disposals during the period, grew to €1.136 billion as at 30 June 2006.

Most of the growth during the period was driven by an increase in the value of the Company’s investment properties, prompted in particular by the tightening of investment yields in the Dublin office market. The Company also generated a substantial profit from the disposal of the Group’s interest in a large development site at Sandyford in South County Dublin.

Other significant transactions during the period included closing the disposal of the Group’s interest in the Allegro site, also in Sandyford. This transaction had been contracted late in 2005 and closed early in the current year. Another transaction which had been contracted in 2005 and which closed during the current period was the acquisition of a substantial parcel of land zoned for a Town Centre development in Collinstown in West Dublin. In addition we successfully negotiated the acquisition of a small property at 97 St. Stephens Green. This is a Georgian office building, adjoining our Russell Court property and is now on the market to let on a short-term basis.

We have managed to progress a number of our larger development projects during the period, including reaching Practical Completion in respect of the 60,000 sq. ft. office development at Barrow Street in Dublin. This development, which was pre-let to the major Dublin legal firm Mason Hayes & Curran, was acquired during 2005 and was completed on time and within budget in February of this year.

Progress in relation to the site adjoining the new Mason Hayes & Curran building included the agreement entered into with Treasury Holdings for Treasury to hand over vacant possession of the building, which they have occupied as their Dublin offices for many years. This agreement, together with the surrender of a long lease on another adjoining building, clears the way for our undertaking a major development on this exciting site. Detailed designs of a scheme proposed for this site have been in the course of preparation for some time and an application to the planning authority, which will include a 26 storey tower overlooking the Grand Canal Dock, is due to be lodged with Dublin City Council in the near future.

A decision of the Planning Appeals Board in respect of our application to refurbish and extend Stillorgan Shopping Centre had been expected during the period. In the event the decision was not issued until August and we are pleased to say that we have finally secured full planning permission for the works to the Centre. In the meantime, we have engaged in a broad-ranging community planning process. The outputs of this master planning exercise have been submitted to the Planning Authority for consideration as it develops the Local Area Plan which covers the wider Stillorgan area, extending beyond the shopping centre and including our other holdings in Stillorgan, such as the Leisureplex and Blake’s sites. No decision will be made with regard to implementing the Planning Approval we have now received until this planning process is completed and it is expected that this should be done before the end of the current year.

During the period, we have also progressed the negotiations with the Local Planning Authority in respect of our Balgaddy site at Clondalkin in West Dublin. Once again, we were happy to report that we have now secured the agreement of the Planning Authority to designate our site, as well as adjoining lands, as a Strategic Development Zone. The effect of this under Irish Planning Legislation is to adopt a Master Plan for a designated area, such that any subsequent Planning Application lodged within that area can be fast-tracked so long as it is compliant with the Master Plan. This effectively means that there is no risk of a Third Party reference to the Planning Appeals Board.

Projects where we have not been successful in securing planning permission include the site of a large office building at Central Park in Leopardstown. We are currently appealing this refusal to the Planning Appeals Board. We were also refused Planning Approval for Phase 1 of our residential scheme at Enniskerry in Co. Wicklow and once again are appealing this refusal.

This has also been a busy period in relation to the Company’s Investment Portfolio. We are pleased to report a number of new lettings in Stillorgan Shopping Centre during the year, A small number of rent reviews were also settled in the Centre during the period and they continue to show good growth over the previous rent passing.

At 35 Henry Street we have agreed terms to accept a surrender of the leasehold interest in this property and to re-let the premises on a new lease at a rent of €425,000 per annum or 75 per cent. more than last year’s rent. This indicates the continued buoyancy in the prime retail market.

Other lease renegotiations which have enhanced the value of the portfolio include the acceptance of a surrender of leases for two floors in Block D, Russell Court with the immediate re-letting of those floors to KPMG at enhanced rents and on a lease term, the expiry of which will coincide with the main leases which KPMG have in respect of their other holdings in Russell Court.

The total rent roll of the Irish property portfolio, including interests in properties held in joint ventures, increased from €32.65 million at 31 December 2005 to €34.59 million at 30 June 2006. The newly tenanted Mason Hayes & Curran building provides rent of €2.88 million with the disposal of the Group’s interest in the Aldi site at Sandyford, Co Dublin giving a reduction of €0.84 million in rent.

Irish Economic Overview

The strong performance of the Irish Economy over the past few years has carried into the first half of 2006 with growth forecast by the Economic and Social Research Institute (“ESRI”) of 5.6 per cent. for the full calendar year.

This growth is being fuelled by strong consumer expenditure and a healthy property market. With the economy close to full employment, the unemployment rate remains one of the lowest in the E.U. at approximately 4.4 per cent. The increase in Euro interest rates during the period was well heralded and thus has had little impact on consumer confidence. However, it is expected that, with further rises in rates anticipated over the next 6-12 months, there will be a slight moderation in the overall rate of growth.

Irish Property Market

Against this economic background, the first half of 2006 was a period of further strong growth in the Irish Property Market with the Society of Chartered Surveyors / Investment Property Databank (“IPD”) Index producing a total return over the 6 month period of 13.8 per cent. The total return for the 12 months to the end of June 2006 was 29.5 per cent., the highest for over 5 years. This growth has been driven primarily by a hardening in investment yields over the period with the IPD all property equivalent yield now at 4.43 per cent. in June 2006, down from 5.35 per cent. in June of last year.

The best performing segment of the Irish property market during the first half of 2006 was the office sector, within which 44 per cent. of REO’s Irish property portfolio lies. Activity in the Dublin office market is continuing to be high with a strong level of take-up recorded for the first half of the year, up 6 per cent. on take-up levels during the corresponding period in 2005. Whilst the vacancy rate eased over the period, it remains high compared with traditional levels, with an overall vacancy rate of approximately 16.5 per cent. The suburbs account for over half of all available space with Dublin city centre closer to market equilibrium. Despite oversupply in the market, the pace of construction activity has increased with over 300,000 sq. m. of accommodation currently under construction. The bulk of this new construction is located in the prime city centre areas, where tenant demand is strongest: it is expected that overall activity in the office sector will rise further during the remainder of the year as both new and existing occupiers seek additional space.

Office rents of between €590 and €650 per sq. m. have been achieved in Dublin 2 and 4 postcodes and the Docklands area and tenant incentives are declining, indicating that the underlying level of rental growth is somewhat higher than the headline level of growth. Suburban schemes vary considerably depending on location, with rental levels of between €160 and €270 per sq. m. being achieved. The professional and financial sectors have been the most active occupiers during the first half of the year, with IT and Telecommunications companies also active. Prime yields in the office sector now stand at around 4.25 per cent: however a small number of recent office investment transactions have occurred at yields below 3 per cent.

The retail sector also continues to perform strongly, with a total return of 20.3 per cent. for the 12 months to the end of June 2006. 24.7 per cent. of REO’s Irish property portfolio is classed as retail space.

Strong retail spending has been boosted by the release of the Special Savings Incentive Account (“SSIA”) monies during the course of this year and next year and recent interest rate increases do not appear to have affected sales activity. The ESRI is projecting consumer expenditure to rise by over 6 per cent. during the course of 2006 and, as has been the case for some time now, international retailers continue to compete strongly with domestic players for the limited prime retail opportunities which come to the market.

The industrial sector in Dublin continued to strengthen during the second quarter of 2006. The vacancy rate for the industrial market fell to around 7.4 per cent. as at end June 2006. This is the lowest vacancy rate recorded in 5 years and is due to the fact that there has been growing occupier demand, combined with relatively limited new speculative development activity. In addition, many of the older traditional industrial locations are being redeveloped for higher value uses.

The completion of the Dublin Port Tunnel later this year will significantly boost the industrial market in the North Dublin Area and this will substantially benefit industrial properties located along the M1 and M50 motorway locations.

The Irish housing market has also continued to enjoy buoyant conditions with house price inflation running at a level of 15 per cent. for the 12 months to June. This continued growth is fuelled by the buoyancy of the economy, above trend employment growth and strong immigration drawn by a healthy labour market. Despite recent upward movements in interest rates, overall borrowing rates remain very low both in relative terms and in real terms.

The European Central Bank increased rates from 2.75 per cent. to 3 per cent. in August 2006 and further increases are expected. The view is however, that the Irish Property Market will continue to perform strongly on the back of positive economic conditions.

UK Property Portfolio

The Company’s realisation of its UK property investment portfolio is now nearly complete with only one asset remaining.

Financing

As reported in the 2005 Annual Report, during the period under review, the Company completed a Commercial Mortgage Backed Securitisation, the first ever secured solely on Irish properties, when it raised a €375 million bond from the capital markets, and a €50 million junior loan from an Irish bank.

The £40 million loan from the Company to Havenview Investments Limited was repaid in the period and following these transactions and the disposal of the Group’s interest in the Aldi site, at Sandyford, Co Dublin reported above, the Group’s cash balances at the end of the period amounted to some £141 million. Overall bank indebtedness amounted to approximately £467 million. Both the cash balances and bank indebtedness amounts above include REO’s share of cash and debt in joint ventures.

Litigation

The Company continues to seek compensation for the substantial losses suffered by the Company in its income portfolio in 2001 and 2002. Proceedings have been served on Aberdeen Asset Managers Jersey Limited, Aberdeen Asset Management Limited and UBS Limited. The parties have served their statements of claim and a trial date has been set for May 2007.

Outlook

Your Company’s concentration on Ireland has served it well, as Irish property has continued to outperform most other countries in Europe, reflecting sustained economic growth in Ireland. Consensus forecasts for the Irish property market remain strong and I am confident that the Company is well positioned to take full advantage. The disposal of the Group’s interest in the Aldi site at Sandyford, Co.Dublin at such a substantial profit, without any development having been undertaken, underlines our confidence in the quality of the Company’s development portfolio.

We continue to explore opportunities which will play to the strengths of the Company’s management team and are actively looking for potential acquisitions both within and outside of Ireland to enable your Company to broaden its base.

RYF Horney
Chairman

28 September 2006