DIRECTORS REPORT AND FINANCIAL STATEMENTS We create environments that people love. Nous créons des espaces appréciés de tous.

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1 DIRECTORS REPORT AND FINANCIAL STATEMENTS 2005 We create environments that people love. Nous créons des espaces appréciés de tous. Directors Report and Financial Statements 2005

2 DIRECTORS REPORT AND FINANCIAL STATEMENTS 2005 Contents 1 Financial Review 4 Corporate Governance 8 Directors Responsibilities 9 Directors Report 11 Corporate Responsibility 13 Remuneration Report 20 Independent Auditors Report 22 Consolidated Income Statement 23 Consolidated Balance Sheet 24 Consolidated Statement of Recognised Income and Expense 24 Reconciliation of Equity 25 Consolidated Cash Flow Statement 25 Analysis of Movement in Net Debt 26 Notes to the Accounts 57 Independent Auditors Report to the Members of Hammerson plc 58 Company Balance Sheet 59 Notes to the Company Accounts 63 Portfolio Review Hammerson plc 100 Park Lane, London W1K 7AR Tel +44 (0) Hammerson SAS Washington Plaza Immeuble Artois, 44 rue Washington, Paris CEDEX 08, France Tel + 33 (1)

3 FINANCIAL REVIEW International Financial Reporting Standards ( IFRS ) In common with all companies listed on European Union stock exchanges, Hammerson adopted IFRS with effect from 1 January The group issued its 2004 full year fi nancial statements restated under IFRS on 26 April 2005, complete with reconciliations to, and explanations of the differences from, the fi gures as they were reported under UK GAAP. The 2005 interim report, published in September, was also prepared under IFRS. These reports are available on the Company s website, Further details of the impacts of the change on reported profi ts and equity shareholders funds are provided in note 27 to the accounts. The main changes to Hammerson s fi nancial statements have been the recognition of the revaluation changes of investment properties and certain derivatives in the income statement rather than the statement of recognised income and expense, and the inclusion in the balance sheet of the tax that may arise on the disposal of all properties in the portfolio. The adoption of IFRS has changed the presentation and format of the fi nancial statements. However, it has no impact on the cash fl ows of the business or its underlying performance. Results and Dividend In 2005 net rental income was million, compared with million in The increase principally refl ected the contribution from recently acquired properties, rent reviews at The Oracle Shopping Centre, indexation in France and the receipt of surrender premiums. On a likefor-like basis, net rental income from the investment portfolio increased by 6.0%. For the portfolio as a whole the year on year movements may be analysed as follows: Net Rental Income Reconciliation m m Properties owned throughout 2005 and Acquisitions Properties sold Developments Exchange translation and other (0.5) Net rental income During the year, net rental income included 4.8 million related to retail tenants turnover and net income of 8.1 million from car parks at the group s shopping centres. Rent receivable of 5.6 million has been accrued and allocated to rent free periods in Administration expenses in 2005 rose by 4.8 million to 31.4 million, primarily due to increased staff costs and a reduction in asset management and development management fees receivable. Provision for the performance related annual bonuses and the cost of other share-based remuneration, the latter also requiring performance criteria to be met before vesting, totalled 4.4 million in 2005, compared with 3.8 million in Net fi nance costs in 2005, excluding the change in fair value of interest rate swaps, increased by 9.8 million compared with 2004 as a result of increased borrowings drawn to fund acquisitions and the development programme, although the effect was partly offset by lower interest rates. The average cost of borrowing in 2005 was 5.8% and interest cover was 1.9 times in both 2004 and Profi t before tax was million, compared with million in Adjusted profi t before tax, which excludes gains on investment properties and certain other items, rose by 6.2 million in 2005 to 89.4 million. 1

4 FINANCIAL REVIEW CONTINUED Results and Dividend (continued) Analysis of Profit Before Tax m m Profit before tax Less: Profi t on sale of investment properties Revaluation gains on investment properties Negative goodwill 6.2 Movement in fair value of interest rate swaps 1.6 Adjusted profit before tax The current tax credit of 1.0 million in 2005 refl ected the write back of prior year tax relating to Germany, whilst profi ts in the year were sheltered from tax by the French tax exemption, UK capital allowances and capitalised interest. The 2004 charge of 80.9 million included the one-off entry charge to the French SIIC regime. The deferred tax charge in 2005 mainly refl ected the increase in the value of the investment property portfolio. Adjusted earnings per share in 2005 increased by 2.5 pence, or 8.7%, to 31.2 pence. Full details of the calculations for earnings per share are provided in note 10 to the accounts. The Directors have proposed a fi nal dividend of pence per share which, together with the interim dividend of 5.80 pence per share, makes a total of pence per share for the year. This represents an increase of 10.0% over the total dividend for Cash Flow Cash fl ow from operating activities was 45 million in 2005, compared with 61 million in the previous year. The decrease arose principally because the fi rst annual interest payment on the 300 million sterling bond issued in February 2004 was made in February This more than offset additional rent receipts during the year. Disposals in 2005 raised 224 million, whilst property acquisitions and capital expenditure amounted to 538 million. After the net cash infl ow of 236 million from fi nancing activities, there was a net decrease in cash and short term deposits over the year of 8 million. Balance Sheet Hammerson s property portfolio was valued at 5,732 million at 31 December 2005, compared with 4,603 million at the end of The revaluation surplus accounted for 773 million of the increase, with additions, including capitalised interest, accounting for a further 616 million. These increases were partly offset by exchange translation losses of 41 million, the sale of properties with a book value of 193 million and transfers to owner occupied properties of 26 million. At the year end, net asset value per share, calculated in line with the recommendations of EPRA, was 12.37, an increase of 292 pence per share or 30.9% during The revaluation surplus contributed 271 pence to the increase, with the remainder primarily accounted for by retained profi ts. 2

5 Results and Dividend (continued) Analysis of Net Asset Value m per share m per share Basic 3, , Effect of dilution: On exercise of share options Diluted 3, , Adjustments: Fair value of interest rate swaps (7.3) (0.02) Deferred tax on revaluation surpluses and other items Deferred tax on capital allowances EPRA, diluted 3, , Basic shares in issue used for calculation (million) Diluted shares used for calculation (million) Borrowings At 31 December 2005, Hammerson s borrowings totalled 2,095 million. With cash and deposits of 46 million, net debt amounted to 2,049 million. The weighted average maturity of debt at 31 December 2005 was approximately nine years. Unsecured borrowings represented 97% of total debt at the year end; secured debt of 70 million was principally in respect of the group s share of a borrowing facility fi nancing the Moorhouse joint venture. Gearing was 66% compared with 72% at the end of 2004 and the loan to value ratio was 38%. The balance sheet at 31 December 2005 included a deferred tax liability of 406 million. If deferred tax is added back to equity shareholders funds, gearing would be 58%. The market value of borrowings at the end of December 2005 was 2,301 million, some 207 million greater than the book value, equivalent, after tax relief, to a reduction in net asset value of 51 pence per share. Undrawn committed facilities at the year end were 283 million which, when added to cash and deposits, provided liquidity of 329 million. In May 2005, Hammerson signed a 370 million fi ve year syndicated revolving credit facility. Since the year end, the Company has issued 300 million unsecured bonds at a coupon of 5.25%, redeemable in December Returns The table below presents information on the returns which the group has achieved during 2005, including the returns from joint ventures, and compares them with benchmark indices where appropriate. Portfolio capital return 17.6% IPD All property benchmark 13.3% Portfolio income return 4.2% IPD All property benchmark 5.4% Portfolio total return 22.5% IPD All propertybenchmark 19.4% Return on shareholders equity 34.0% Estimated cost of equity 7.3% Total shareholder return 20.1% FTSE 350 real estate index 20.3% The IPD All property benchmark includes retail, offi ce and industrial property returns for United Kingdom property. Hammerson does not invest in industrial property, which had the lowest sector returns in The principal reasons why Hammerson outperformed the IPD benchmark for capital returns were the valuation increases on developments and the valuation growth in the French portfolio. Income returns were lower than the benchmark as the group invests in prime shopping centres and offi ces, which attract low yields. Hammerson s return on shareholders equity for the year ended 31 December 2005 was 34.0%, which compares with the group s estimated cost of equity of 7.3%. The majority of the return on shareholders equity for 2005 resulted from property revaluation gains. Total shareholder return, comprising increases in the share price and dividends, was 20.1%, marginally below the total return on the FTSE 350 real estate index. Over the last three years, Hammerson s total shareholder return was 135.3%, some ten percentage points above the real estate index. 3

6 CORPORATE GOVERNANCE A summary of the system of governance adopted by the Company is set out below. Throughout the year ended 31 December 2005, except where otherwise explained, the Company has complied with the Code provisions set out in section 1 of the Combined Code on Corporate Governance issued by the Financial Reporting Council in July Board of Directors The Board operates within the terms of its written authorities, which include a schedule of matters reserved for the approval of the Board. The Board currently consists of the Chairman, fi ve Executive Directors and fi ve Non-Executive Directors who meet not less than ten times during the year. All directors were present at all meetings of the Board held during the year, with the exception of John Barton, who was unable to attend one meeting as a result of another business commitment, and Graham Pimlott who was unable to attend one meeting due to illness and one due to his absence abroad. The roles and responsibilities of the Chairman, Chief Executive, Executive Directors and Non-Executive Directors are clearly defi ned. The Board has ultimate responsibility for Hammerson s overall strategy, acquisition and divestment policy, approval of major capital expenditure projects, risk management, internal control, treasury and the raising of fi nance, human resources and corporate governance. The procedures and accountability for these matters, which are delegated to management, are set out in the Company s operations and control manuals. A schedule of routine matters to be addressed by the Board and its Committees is agreed on an annual basis and information is supplied to the Board in a manner that enables the Board to fulfi l its responsibilities. Presentations on business and operational issues are made regularly to the Board by senior management. All directors are kept informed of changes in relevant legislation and changing commercial risks. The professional development requirements of Executive Directors are identifi ed and progressed as part of each individual s annual appraisal. Non-Executive Directors attend seminars and undertake external training in areas they consider to be appropriate for their own professional development and a record of this is maintained. The Board and its Committees monitor and evaluate their own performance and the contribution made by individuals. This process of board evaluation was enhanced during 2004 with the introduction of more structured and objective evaluation procedures and a review was undertaken by the Board during 2004, from which it was concluded that the Board and its Committees act effectively and that the individual directors who serve the Board and its Committees are performing a valuable role. Given that it was known that there would be a change in Chairman in September 2005, it was decided that no formal review would be carried out in 2005 and that the next evaluation would be undertaken in The Chairman meets as necessary, but at least once each year, with the Non-Executive Directors without Executive Directors present. The Non-Executive Directors meet annually without the Chairman in order to appraise his performance. This meeting is chaired by the Senior Independent Director. All directors have access to independent professional advice and to the advice and services of the Company Secretary who is responsible to the Board for advice on corporate governance matters and for ensuring that Board procedures are followed and that the Company and the Board operate within applicable legislation, rules and regulations. The appointment and removal of the Company Secretary is a matter requiring approval of the Board. The Company maintains directors and offi cers liability insurance, which is reviewed annually. The Company s directors and offi cers are adequately insured in line with the guidelines produced by the Institute of Chartered Secretaries and Administrators. In accordance with the Company s Articles of Association, directors are required to submit themselves for election at the fi rst opportunity after their appointment and thereafter for re-election at least every three years. The Board is satisfi ed that the Non-Executive Directors, each of whom is independent from management and has no commercial or other connection with the Company, are able to exercise independent judgement. Their experience, gained from varied commercial backgrounds, enables them to make a valuable contribution to the Company. John Nelson, who became Chairman on 1 October 2005, holds other positions which are set out on page 6 of the Annual Review and Summary Financial Statements. The Board is satisfi ed that these appointments do not adversely affect his commitment as the Company s Chairman. John Barton is the Senior Independent Director as defi ned in the Code and is available to shareholders if the normal channels of contact are inappropriate for whatever reason. In this role he would deputise for the Chairman in his absence and is available to advise and counsel particularly non-executive, but also executive, colleagues. He is a member of the Remuneration and Nomination Committees. The Company has developed an induction programme which is tailored to the specifi c requirements of newly appointed Non-Executive Directors. On their appointment, Non-Executive Directors meet with the Chairman and the Chief Executive and are provided with briefi ngs on their responsibilities as directors and on the Company s business and procedures. Non-Executive Directors also meet with representatives from the Company s auditors and advisers and with members of senior management who provide further information on the Company s operations including visits to the Company s properties. 4

7 Executive Directors are encouraged to take non-executive positions in other companies to broaden their experience. Simon Melliss was appointed as a non-executive director of Associated British Ports Holdings PLC on 1 March 2006 and is a member of the Committee of Management of Hermes Property Unit Trust for which he receives fees of 35,000 per annum and 20,000 per annum respectively. John Bywater is a nonexecutive director of Workspace Group plc and Land Management Limited for which he receives fees of 25,000 per annum and 10,000 per annum respectively. Each of them retains the fees payable in respect of these positions. Standing Committees of the Board The Board has Audit, Remuneration and Nomination Committees, each of which has written terms of reference which are regularly reviewed and which deal clearly with their authorities and duties. Copies of these terms of reference are available on the Company s website and in writing on request. Each of these Committees is comprised of Non-Executive Directors of the Company. Details of these committees are set out below: (a) Audit Committee The Audit Committee comprises John Hirst (Chairman), John Clare and David Edmonds. John Hirst is a Chartered Accountant. The Committee met on fi ve occasions during 2005 and all members of the Committee attended all meetings. The Committee reviews matters affecting Hammerson s internal controls and their effectiveness and, on an annual basis, external audit arrangements including the level of fees and the independence and objectivity of the auditors, the merits of establishing a dedicated internal audit function and the provision of non-audit services to the Company by the external auditors. It also reviews the interim and full year fi nancial statements prior to their submission to the Board, the application of the Company s accounting policies, any changes to fi nancial reporting requirements and such other related matters as the Board may require. Senior representatives of the external auditors, executive directors and advisers regularly attend the meetings. (b) Remuneration Committee The Remuneration Committee comprises John Barton (Chairman), John Clare and Tony Watson. John Nelson resigned from the Committee on 1 October 2005 following his appointment as Chairman of the Company and Graham Pimlott resigned on 31 December Tony Watson was appointed to the Committee on 1 February The Committee met three times during 2005 and all members of the Committee attended all meetings which they were eligible to attend. It reviews the terms and conditions of employment of the Executive Directors and senior management. The report of the Remuneration Committee is given on pages 13 to 19. The Chairman and the Chief Executive (other than in respect of his own position) are invited to attend the meetings. (c) Nomination Committee The Nomination Committee comprises John Nelson (Chairman), John Barton and John Clare. John Nelson was appointed a member of the Committee on 7 April 2005 and Chairman of the Committee following the retirement of Ronald Spinney on 1 October John Clare was appointed a member of the Committee following the retirement of Graham Pimlott on 31 December All members of the Committee were present on each of the four occasions on which the Committee met in 2005, other than two meetings which John Barton was unable to attend because of other business commitments. The Committee undertakes an annual review of succession planning and ensures that the membership and composition of the Board, including the balance of Executive Directors and Non-Executive Directors, continues to be appropriate. This review includes consideration of the independence of Non-Executive Directors and of the balance of skills and knowledge required of both Executive Directors and Non-Executive Directors. During the year, on the recommendation of the Committee, the appointment of Tony Watson with effect from 1 February 2006 was approved by the Board. In addition, the Committee s recommendation that Tony Watson be appointed as a member of the Remuneration Committee was approved by that Committee and the Board and the recommendation that John Barton be appointed the Senior Independent Director, following the retirement of Graham Pimlott as Deputy Chairman on 31 December 2005, was approved by the Board. The Committee normally uses the services of external recruitment consultants. During 2004, Ronald Spinney confi rmed to the Board that it was his intention to retire as a Director and Chairman on 30 September A special Nomination Committee was formed comprising all Non-Executive Directors, with the exception of any individual who wished to be considered for the post of Chairman, for the sole purpose of ensuring the appointment of a new Chairman. Graham Pimlott, as Deputy Chairman, chaired the Committee. During 2004, an external adviser was appointed to propose suitable candidates, following which, the Nomination Committee recommended to the Board that John Nelson be appointed Chairman with effect from 1 October 2005 for a period of three years ending on 30 September

8 CORPORATE GOVERNANCE CONTINUED External Auditors The Company s external auditors are Deloitte & Touche LLP. The audit partner responsible for the Company s audit matters is changed every fi ve years in accordance with the Ethical Standards issued by the Auditing Practices Board. In forming their opinion on the independence and objectivity of the external auditors, the Audit Committee takes into account the safeguards operating within Deloitte & Touche LLP. Regard is had to the nature of and remuneration received for other services provided by Deloitte & Touche LLP to the Company and, inter alia, confi rmation is sought from them that the fee payable for the annual audit is adequate to enable them to perform their obligations in accordance with the scope of the audit. In respect of the year ended 31 December 2005, the Auditors remuneration comprised 575,000 for audit work and 150,000 for other work. The Audit Committee has reviewed the briefi ng paper on effective communication between audit committees and external auditors issued in September 2002 by the Auditing Practices Board and, having considered the recommendations of the briefi ng paper with the external auditors, has concluded that the relationship between the Audit Committee and Deloitte & Touche LLP is in accordance with the objectives contained therein. Trustees of the Pension Scheme The Company s principal pension scheme, The Hammerson Group Management Limited Pension & Life Assurance Scheme, is administered by two corporate trustees. One is an independent trustee. The other is a subsidiary of the Company which has fi ve directors. The Chairman of this subsidiary is David Edmonds, one of the Company s Non-Executive Directors. Graham Pimlott, who retired as a Non-Executive Director on 31 December 2005, is also a director of this subsidiary and the remaining directors are employees, but not directors, of the Company. The Scheme s funds are invested and managed independently of the Company. This Scheme is closed to new entrants and a Group Personal Pension Plan has been established for new employees. Shareholders The Board aims to achieve clear reporting of fi nancial performance to shareholders. The Company has an investor relations programme whereby the Chief Executive and Finance Director, together with other Executive Directors and other senior executives, meet institutional investors and analysts during the year. Presentations to investors and the accompanying script are simultaneously posted on the Company s website. To ensure that the Board is informed of any views expressed at such meetings and presentations, the Company s brokers prepare a report on feedback which, together with information provided by the Director of Corporate Affairs, is reported to the Board. Private shareholders are invited to ask questions at the Company s Annual General Meeting and meet the Directors informally after the meeting. The number of proxy votes cast in resolutions is announced at the Annual General Meeting. Internal Control The Board has ultimate responsibility for the group s system of internal control and for reviewing its effectiveness. This system is designed to safeguard assets against unauthorised use or disposition, ensure the maintenance of proper accounting records, provide reliable fi nancial information and ensure compliance with relevant legislation and regulations. There is a regular review process throughout the year of the effectiveness of the group s system of internal controls, including fi nancial, operational and compliance controls and risk management, although any such system can only provide reasonable and not absolute assurance against material misstatement or loss. This system is designed to manage the achievement of business objectives. The group has established, and the Board regularly reviews, risk management procedures and procedures necessary to enable the Directors to report on internal controls in compliance with the Code. The risk management procedures involve the analysis, evaluation and management of the key risks to the group, including those relating to joint venture arrangements and has plans for the continuance of the Company s business in the event of unforeseen interruption. The Board has allocated responsibility for the management of each key risk to Executive Directors and senior executives within the group who report on these risks to the Board. Any recommendations arising from such reports and reviews are implemented under the supervision of the Board. The Company conducts internal audit activities through a programme of internal controls reviews which are undertaken by a combination of Company employees and external advisers as appropriate. The reviews are overseen and co-ordinated by an Internal Controls and Risk Management Committee.The Committee comprises executives from the fi nance and operational parts of the business, is chaired by the Group Finance Director, and is intended to ensure that internal control is integrated into Hammerson s daily operations. The Audit Committee has reviewed these arrangements and is satisfi ed that they provide an appropriate overview of the Company s internal control procedures and continue to be an effective alternative to a dedicated internal audit function. 6

9 The other key elements of the group s system of internal control are as follows: Regular meetings of the Board and the Audit Committee whose overall responsibilities are set out above. A management structure that is designed to enable effective decision making with clearly defi ned responsibilities and limits of authority. An important part of this structure is a monthly meeting of the Executive Directors and monthly meetings of management boards in the UK and France. The maintenance of operational control manuals setting out a control framework for management to operate within and containing guidance and procedures for the group s operations. The measurement of the group s fi nancial performance on a regular basis against budgets and long term fi nancial plans. The Company has whistleblowing procedures under which staff may report any suspicion of fraud, fi nancial irregularity or other malpractice. The Company subscribes to the independent charity, Public Concern at Work, so that staff may have free access to their helpline. The system of internal control and the effectiveness thereof have been reviewed by the Board for the year under review and during the period up to the date of this report and the process accords with the Turnbull guidance. By Order of the Board Stuart Haydon Secretary 10 March

10 DIRECTORS RESPONSIBILITIES Directors Responsibilities in Respect of the Preparation of the Financial Statements The Directors are responsible for preparing the annual report and the consolidated fi nancial statements for the group in accordance with International Financial Reporting Standards (IFRS), company law and relevant regulations. They have chosen to continue to prepare the accounts for the Company in accordance with United Kingdom Generally Accepted Accounting Practice. International Accounting Standard 1 requires that fi nancial statements present fairly for each fi nancial year the group s fi nancial position, fi nancial performance and cash fl ows. In virtually all circumstances, a fair presentation will be achieved by compliance with all applicable International Financial Reporting Standards. Directors are also required to: properly select and apply accounting policies; present relevant, reliable and comparable information, including accounting policies; and state whether applicable accounting standards have been followed. In the case of UK GAAP company accounts, the Directors are also required to prepare fi nancial statements for each fi nancial year which give a true and fair view of the state of affairs of the Company and of the profi t or loss of the Company for that period and to make judgements and estimates that are reasonable and prudent. The Directors are responsible for keeping proper accounting records which disclose with reasonable accuracy at any time the fi nancial position of the Company, for safeguarding the assets, for taking reasonable steps for the prevention and detection of fraud and other irregularities and for the preparation of a Directors Report and Directors Remuneration Report which comply with the requirements of the Companies Act Legislation in the United Kingdom governing the preparation and dissemination of fi nancial statements may differ from legislation in other jurisdictions. 8

11 DIRECTORS REPORT The Directors submit their Report and the audited fi nancial statements for the year ended 31 December Results for the Year The results for the year are set out in the consolidated income statement on page Dividends The Directors recommend a fi nal dividend of pence per share which, together with the interim dividend paid on 20 October 2005, will make a total dividend for the year of pence (2004: pence). It is intended that warrants in respect of the fi nal dividend will be posted on 16 May 2006 for payment on 17 May 2006 to shareholders on the register at the close of business on 18 April Principal Activities and Future Prospects The principal activities of the Company have continued to be property investment and development. The Annual Review and Summary Financial Statements should be read in conjunction with this report. 4 Fixed Assets Changes in tangible fi xed assets during the year are set out in notes 11 and 12 to the fi nancial statements on pages 38 and 39, whilst details of Hammerson s property portfolio are provided on pages 63 to Share Capital Changes in the Company s share capital are set out in note 21 to the fi nancial statements on pages 49 and 50. On 31 December 2005 there were 284,985,440 ordinary shares of 25 pence each in issue. 6 Purchase of Own Shares The Company was granted authority at the Annual General Meeting in 2005 to purchase its own shares up to a total aggregate value of 15% of the issued nominal capital. That authority expires at the 2006 Annual General Meeting and a resolution will be proposed for its renewal. The Company did not purchase any of its shares during the year. 7 Going Concern After making appropriate enquiries, the Directors have a reasonable expectation that the Company has the resources to continue in business for the foreseeable future. Therefore, the fi nancial statements have been prepared on the going concern basis. 8 Substantial Interests in the Share Capital of the Company At 1 March 2006 the following substantial interests in the issued share capital of the Company had been notifi ed: Ordinary shares of 25p each Percentage of total issued capital Stichting Pensionenfonds ABP 15,293, % Legal & General Group PLC 10,811, % 9 Directors The Directors of the Company and biographical details are shown on pages 6 and 7 of the Annual Review and Summary Financial Statements. John Nelson, Graham Pimlott, John Richards, John Barton, John Bywater, John Clare, Peter Cole, Gerard Devaux, David Edmonds, John Hirst and Simon Melliss served throughout the year. Tony Watson was appointed as a Non-Executive Director with effect from 1 February Ronald Spinney retired as a director on 30 September 2005 and Graham Pimlott retired as a director on 31 December Peter Cole and Tony Watson, who retire in accordance with the Articles of Association, and John Nelson, who retires having been appointed Chairman during the year, offer themselves for re-election at the forthcoming Annual General Meeting. Peter Cole is an Executive Director. John Nelson is Chairman of the Company and Chairman of the Nomination Committee. Tony Watson is a Non-Executive Director and a member of the Remuneration Committee. John Richards, John Bywater, Peter Cole and Simon Melliss have service agreements with the Company. Gerard Devaux s appointment is governed by a deed of appointment. The appointments of the Non-Executive Directors, including the Chairman, are governed by letters of appointment. Details of the service agreements and the letters of appointment are set out in paragraph 6 of the Remuneration Report on page 16. Details of the Directors interests in the share capital of the Company are set out in paragraph 10 below. 9

12 DIRECTORS REPORT CONTINUED 10 Directors Interests The benefi cial interests of the Directors in the ordinary shares of the Company are set out below: 1 March December January 2005 John Nelson 10,000 10,000 Graham Pimlott (retired 31 December 2005) 7,000 7,000 7,000 John Richards 44,576 39,907 25,599 John Barton 6,000 6,000 6,000 John Bywater 20,586 17,739 9,316 John Clare 7,000 7,000 7,000 Peter Cole 25,971 23,036 14,470 Gerard Devaux 75,596 73,286 10,432 David Edmonds 4,000 4,000 2,000 John Hirst 1,455 1,455 1,455 Simon Melliss 30,378 27,283 16,632 Tony Watson, who was appointed a Director on 1 February 2006, has no interests in the shares of the Company. In addition, as benefi ciaries under the discretionary trust which holds shares to satisfy awards under the Hammerson plc Deferred Share Plan and Bonus Scheme, each of John Richards, John Bywater, Peter Cole, Gerard Devaux and Simon Melliss had an interest on 31 December 2005 in the 740,083 shares held by that trust (1 January 2005: 605,408). No contract existed during the year in relation to the Company s business in which any director was materially interested. 11 Directors Remuneration Details of the remuneration and share options of each of the Directors are set out in the Remuneration Report on pages 13 to Donations During the year Hammerson made charitable donations in the United Kingdom of 112,670 (2004: 103,385). Under the Company s charitable donations policy, donations are made to a variety of social, medical and arts charities and to charities connected to localities in which the Company is represented. In addition to these charitable donations, the Company provides fi nancial assistance to other projects of benefi t to the community. Political donations are not made. 13 Creditor Payment Policy It is the Company s policy and practice that the terms of payment to suppliers are agreed in advance of the supply of any goods and services and that payments are made in accordance with those terms and conditions provided that the supplier has also complied with them. At 31 December 2005, the Company had 25 days (2004: 29 days ) purchases outstanding. 14 Financial Instruments Details of the fi nancial instruments used by the group are set out in note 19 to the Financial Statements on pages 45 to Auditors Deloitte & Touche LLP are willing to be reappointed as auditors to the Company and a resolution concerning their reappointment will be proposed at the Annual General Meeting. Their reappointment has been considered and recommended by the Audit Committee. 16 Annual General Meeting The Annual General Meeting will be held on Thursday 4 May 2006 at 100 Park Lane, London W1K 7AR at 10.30am. The Notice of Meeting and the explanatory notes can be found in a separate notice accompanying the Annual Review and Summary Financial Statements. By Order of the Board 10 Stuart Haydon Secretary 10 March 2006

13 CORPORATE RESPONSIBILITY Hammerson has published a document which describes its philosophy and approach to Corporate Responsibility and its commitment to continuous improvement in this area. The Company s policies and procedures are supported by appropriate targets and performance measures, which are published on the Company s website ( in an annual CR Performance Report. Hammerson recognises that it has responsibilities towards all those with whom it has dealings, including investors, employees, occupiers, suppliers, local communities and Government. The Company is also aware of its responsibilities towards the environment. Hammerson s detailed commitments in relation to each of these are encapsulated in the Hammerson Charter our CR policy statement. The Corporate Responsibility Committee, which comprises senior employees from different disciplines and is chaired by John Bywater, is responsible for formulating and monitoring Corporate Responsibility policies. Within the Company s risk management programme, the Board approves all policies relating to ethical, social, environmental, health and safety issues and receives regular reports on these matters. This ensures that internal standards are met and legislation complied with. The Company undertakes regular independent research to ascertain and monitor the perceptions of key stakeholders, such as investors, customers, staff and business partners. Such research enables Hammerson to enhance the quality of its working practices and relationships. Business Ethics Hammerson has made a public commitment, through the Hammerson Charter, to all its business partners and advisers over the way in which it deals with them. In particular, it aims to be honest, professional and fair and it encourages suppliers and sub-contractors to operate according to similar principles. All employees receive a copy of the Hammerson Code of Conduct. This makes clear the standard of behaviour expected from them and their responsibility for maintaining and enhancing the Company s reputation. Investors The Board believes in the importance of effective communication. All investor relations activities are undertaken within the guidelines and regulations set by the UK Listing Authority, the London Stock Exchange and Euronext Paris. Hammerson seeks to improve investors understanding of its objectives, strategy and performance. The Company implements a comprehensive investor relations programme, making available the Chief Executive, Finance Director and other senior directors, to meet with investors in order to explain Hammerson s business and fi nancial performance and to answer questions. Hammerson subscribes to the London Stock Exchange s Corporate Responsibility Exchange, which is an online platform to meet corporate responsibility information requirements of investors and fund managers. The Company s approach to corporate governance is set out on pages 4 to 7. Employees Hammerson provides its employees with clean, healthy and safe working conditions and respects their human rights. It recognises the need to attract and retain employees of a high calibre and is committed to the principle of equal opportunity, within a framework of clear terms of employment. The Company invests in its employees, offering training and development to help them maximise their potential and contribute fully to the Company s business objectives. Individual performance is regularly appraised. In the United Kingdom, Hammerson has had an accreditation from Investors in People since The Company believes in a fair remuneration policy and that employees should have an interest in the Company s fi nancial performance. Staff in the UK participate in a share incentive plan and certain staff are eligible for grants of options. Details of the Company s share option scheme and long term incentive plan are set out in the Remuneration Report which follows on pages 13 to 19. In addition, employees are able to participate in a savings related share option scheme. Health and Safety Hammerson operates and continually reviews its health and safety policies and practices, monitoring current and proposed legislation to ensure appropriate safety standards are maintained. All its properties are subject to an external health and safety audit programme. Employees receive appropriate training and are made aware of health and safety policy and their responsibilities for its implementation. Local Communities The support of local communities is crucial to the success of Hammerson s developments, particularly its city centre, retail-led regeneration schemes. Attention is paid to ensuring that interested parties have an opportunity to understand the development proposals and voice their opinions. 11

14 CORPORATE RESPONSIBILITY CONTINUED Property Industry Directors and senior management are encouraged to represent the Company s views and contribute towards the development of the property industry by serving on the boards of industry bodies such as the British Property Federation, the British Council of Shopping Centres, the City Property Association, the European Public Real Estate Association, the National Council of Shopping Centres in France and the Fédération des Sociétés Immobilières et Foncières. Environment The Company s environmental policy, which may be viewed on the Company s website, sets out the procedures concerning environmental management that Hammerson follows to ensure compliance with environmental legislation in those countries in which it operates. The policy, which is regularly reviewed, covers environmental matters relating to the management of its investment and development properties and the conduct of its business. The Company carries out regular maintenance and, where practicable, improvement programmes to ensure the effi cient operation of its buildings and to reduce energy consumption having regard to tenants needs and the age of buildings. In addition Hammerson encourages tenants to follow environmental procedures compatible with its own. The environmental impact of developments and building works is managed through careful consideration of design, selection of materials and construction techniques. Consultants and contractors are required to adhere to the Company s policy and encouraged to suggest improvements. Prior to any property acquisition, an environmental assessment is undertaken to identify possible contamination or the presence of materials considered environmentally harmful. Remedial action is taken where appropriate. In its day to day business, Hammerson follows guidelines aimed at reducing energy consumption, uses appropriate materials and encourages recycling. It recycles paper, toner cartridges and glass at its own offi ces. Employees are aware of the Company s responsibilities and their duties in implementing environmental management procedures. The Company has set itself a number of environmental targets and management tasks with clearly allocated responsibilities. Progress against these targets is reviewed annually and reported on Hammerson s website A founding member of the Property Environment Group (PEG Hammerson was ranked amongst the best performing companies in the March 2005 PEG benchmarking survey of environmental engagement in the property industry. The Company also participates in the Business in the Environment annual index of the FTSE

15 REMUNERATION REPORT The Directors submit their report on remuneration for the year ended 31 December This report has been approved and adopted by the Board and has been prepared in accordance with the requirements of s234b of the Companies Act 1985 (as amended by The Directors Remuneration Report Regulations 2002 ( the Regulations )) and the Listing Rules. The information contained in paragraphs 3, 7 and 8 below is subject to audit in accordance with the Regulations. 1 The Remuneration Committee The Board has appointed a Remuneration Committee which meets no less than twice a year to consider, for recommendation to the Board, company policy on the remuneration of Executive Directors and to approve the composition and level of remuneration of Executive Directors and certain senior executives. This includes an annual review of all incentive plans to ensure that they remain appropriate to the Company s current circumstances and prospects. The Board has accepted, without amendment, the Committee s recommendations relating to remuneration policy. The Committee currently comprises John Barton (Chairman), John Clare and Tony Watson, who was appointed on 1 February Remuneration Policy In determining an appropriate remuneration policy for recommendation to the Board, the Committee s objective is to ensure that the Company continues to attract, retain and motivate experienced individuals, capable of making a major contribution to Hammerson s success. Remuneration for Executive Directors and senior executives takes account of performance through an annual performance related bonus scheme and, for long term performance, by the award of shares under a long term incentive plan. The Board s intention is that Executive Directors should build a shareholding in the Company with a value equivalent to at least their annual basic salary. To assist the Committee in determining remuneration policy, the Committee has received advice from Hay Group who have been appointed by the Committee and who provide no other services to the Company. In addition, although they are not members of the Committee, information and advice has been provided and recommendations have been made by Ronald Spinney (until his retirement as Chairman on 30 September 2005), John Nelson, John Richards (other than in respect of his own position) and by the group s Director of Human Resources. In implementing the policy, following its approval by the Board, the Committee takes into account remuneration packages available within other comparable companies, the Company s overall performance, achievement of corporate objectives, individual performance and published views of investors and their representatives. 3 Remuneration of Executive Directors and Senior Executives The remuneration packages for senior staff, including Executive Directors, consist of the following elements and are structured to reward corporate and individual performance. Details of all payments to Executive Directors, which are disclosed in the table in paragraph 7 on page 17 show the relative values of basic and performance related elements of remuneration. (i) Basic Salary and Benefits Basic salaries for Executive Directors and other senior executives are reviewed by the Committee, normally annually or otherwise on promotion, having regard to responsibility, competitive market practice, company and individual performance and independently compiled salary survey information. Benefi ts include the use of a company car or the provision of a car allowance, medical insurance and life assurance cover. (ii) Annual Performance Related Bonus Scheme Full time staff throughout the Company, including Executive Directors, participate in a performance related bonus scheme. Payments under the scheme, which are not pensionable, are based on the achievement of profi t, net asset value and operational targets. The amount payable to Executive Directors in any one year could be up to 100% of their basic salary, with 60% of the payment receivable in shares in the Company of which half vest immediately and half vest two years after the date of grant. 13

16 REMUNERATION REPORT CONTINUED Between 1 January 2005 and 1 March 2006 the following shares were issued to Executive Directors under the bonus scheme, based on the achievement of performance targets in respect of the previous fi nancial year: Number of shares 14 Date of grant 1 March March 2006 John Richards 3,939 4,669 John Bywater 2,346 2,847 Peter Cole 2,489 2,935 Gerard Devaux 1,575 2,310 Simon Melliss 2,762 3,095 (iii) Pensions The UK resident Executive Directors are members of the Company s non-contributory pension scheme, details of which are set out in note 6 to the fi nancial statements on pages 32 and 33. (iv) Long Term Incentive Plan Executive Directors and senior executives may be awarded shares under the Hammerson plc Deferred Share Plan ( the Plan ). The Plan was established to align the rewards received by participants to the Company s fi nancial performance and provide them with the opportunity to build a holding of shares in the Company. Following the introduction of the Plan, participants are no longer eligible for grants of options under the Company s share option schemes which are described below. The Committee approves awards under the Plan by way of nil cost options. The annual value of awards under the Plan are set to a maximum of 95% of salary. Under the terms of the Plan, the actual number of shares received by participants is based on the comparative total shareholder return performance of the Company against a peer group of the eight largest quoted UK property companies, including Hammerson. The other members of the group currently comprise Brixton plc, Great Portland Estates plc, Land Securities Group plc, Liberty International plc, Derwent Valley Holdings plc, Slough Estates plc and The British Land Company plc. There will be no vesting of shares unless the Company s performance is in the top half of the comparator group and there will be a progressive vesting schedule according to the Company s ranking within the top half of the comparator group as follows: % of Ranking shares vesting 1st nd rd th The Plan is administered by a Trustee which has acquired shares, fi nanced by drawing down interest free loan facilities from the Company, to satisfy the issue of shares to participants under the Plan and under the Annual Performance Related Bonus Scheme referred to in paragraph 3(ii) above. The Company fi nanced the purchase of 975,000 shares for the Trust by a loan of 5,552,489. At 31 December 2005 the Trustee held 740,083 shares, 234,917 shares having been used for payments under the bonus scheme and Long Term Investment Plan. Under the terms of the Trust, the Trustee is obliged to waive dividends on this holding of shares, except for a nominal amount. At 31 December 2005 the maximum number of shares that could be awarded to Executive Directors under all grants made under the Plan to date was as follows: Maximum number of shares Date of grant 26 September May March 2005 John Richards 55,822 55,165 46,685 John Bywater 33,288 31,523 26,600 Peter Cole 33,288 33,672 28,771 Gerard Devaux 36,702 32,956 27,685 Simon Melliss 42,677 38,687 32,571 The performance target was last revised for grants made in 2003 and thereafter. The Plan s performance target and level of vesting will be reviewed again later in This review will consider evolving market practice in the context of ensuring the Company provides appropriate reward relative to performance.

17 (v) Share Options Employees, including Executive Directors prior to the introduction of the Long Term Incentive Plan, have been granted share options under the Hammerson plc 1995 Approved and Unapproved Share Option Schemes. No payment is made by participants in consideration for the grant of options. The Unapproved Scheme was established to allow the grant of options where the cumulative value of subsisting options as at the date of their grant is in excess of 30,000. The Committee approves grants, which are phased, of share options under the Schemes. Both Schemes are subject to performance targets. Options granted between 1995 and 2004 can be exercised only if the rate of increase in the Company s earnings per share over any three year period is at least 6% in excess of the rate of increase in the Retail Price Index during that period. During 2005 the Schemes were renewed for a further ten years and altered by reducing the maximum number of options which may be awarded to an individual in any one year and increasing the level of the performance target in excess of the Retail Price Index increase over three years from 6% to 9%. Details of the Directors interests in options over ordinary shares of the Company under the Company s executive share option schemes are as follows: Market price at Date from 1 January 31 December Exercise date of Gain which Expiry 2005 Exercised 2005 price exercise 000 exercisable date John Richards 38,806 (38,806) p p ,081 63, p ,887 (38,806) 63, John Bywater 47,962 (47,962) p p ,962 (47,962) 268 Peter Cole 5,700 (5,700) p p 33 11,356 (11,356) p 1,010.00p 67 17,056 (17,056) 100 Gerard Devaux 83,756 (83,756) p p ,756 (83,756) 479 Simon Melliss 16,100 (16,100) p p 84 50,418 (50,418) p p ,518 (66,518)

18 REMUNERATION REPORT CONTINUED The Directors interests in options over ordinary shares of the Company under the Company s savings related share option scheme are as follows: 1 January 31 December Exercise Expiry 2005 Granted Exercised Lapsed 2005 price year John Richards 5,360 5, p 2006 Peter Cole 2,356 2, p 2010 The middle market quotation of the Company s ordinary shares, as derived from the London Stock Exchange Daily Offi cial List, was 1,022 pence on 31 December 2005 and the range during the year was 815 pence to 1,022 pence. 4 Share Incentive Plan The Share Incentive Plan was approved by shareholders at the Annual General Meeting held on 5 May Under the Plan, subject to certain restrictions, all employees are eligible to receive Free Shares up to a value of 3,000 each year, subject to achievement of a performance target. In addition, employees can purchase Partnership shares, up to a value of 1,500 each fi scal year, which the Company will match through the award of Matching Shares on the basis of two Matching Shares for every Partnership Share purchased. Dividends on shares held under the Plan are used to purchase additional shares. The fi rst award of Free Shares will be made in April 2006 in respect of the year ended 31 December 2005 and employees will be able to purchase Partnership Shares from March Share Ownership Guidelines All Directors are encouraged to own shares in the Company. Certain elements of total remuneration are designed to encourage Executive Directors, over a period of time, to acquire a shareholding of a value equivalent to at least their annual basic salary. 6 Service Agreements John Richards, John Bywater, Peter Cole and Simon Melliss have service agreements which may be terminated by the Company on 12 months notice. These agreements were entered into on 28 February If a contract is terminated at short notice, any resulting compensation would not be subject to mitigation. Gerard Devaux s appointment is governed by a deed of appointment under which there is a notice period of four weeks. He is based in Paris and, in accordance with French employment legislation, has a service agreement as an employee and director with a French subsidiary of the Company with a notice period of three months, but under which any payment made in the event of termination at short notice is subject to a minimum of 12 months and a maximum of 21 months. The Chairman and the Non-Executive Directors do not have service contracts with the Company. Their appointments are governed by letters of appointment, which are available for inspection on request. The Chairman s appointment, which is subject to 12 months notice, is for a period of three years ending 30 September The appointments of the Non-Executive Directors are reviewed by the Chairman and the Executive Directors every three years and, accordingly, will next be reviewed as follows: David Edmonds 7 May 2006 John Hirst 28 February 2007 John Barton 30 June 2007 John Clare 31 December 2007 Tony Watson 31 January 2009 Notwithstanding the intention that the appointments of Non-Executive Directors are for the term of three years, such appointments are at all times subject to the right for either party to terminate the appointment on not less than three months notice. Peter Cole and Tony Watson, who retire in accordance with the Articles of Association, and John Nelson, who retires having been appointed Chairman during the year, offer themselves for re-election at the forthcoming Annual General Meeting. 16

19 7 Remuneration of Directors The Chairman of the Board, John Nelson, is a Non-Executive Director and his fee, and those of the other Non-Executive Directors, are determined by the Board, having regard to the contribution required from and the responsibility taken by Non-Executive Directors and current market practice including the level of fees paid to Non-Executive Directors of comparable companies. Currently the Chairman receives an annual fee of 175,000, Non-Executive Directors receive a basic annual fee of 35,000 plus an additional sum of 3,500 in respect of membership of the Audit and Remuneration Committees. To refl ect their additional responsibilities, further fees of 5,000 are payable to the Chairman of each of these committees and the Senior Independent Director is paid an additional fee of 10,000. Non-Executive Directors are not eligible for performance related bonuses or grants of options and their fees are not pensionable. The following table shows a breakdown of the remuneration of the Directors for the year ended 31 December 2005: Total emoluments Performance excluding pension Long term incentive Gain on exercise Salary related Benefi ts contributions plan gain on shares of share options and fees bonus in kind Executive Directors John Richards John Bywater Peter Cole Gerard Devaux Simon Melliss Non-Executive Directors John Nelson Ronald Spinney (retired 30 September 2005) Graham Pimlott John Barton John Clare David Edmonds John Hirst , ,827 2, , The performance related bonus included in the table above is payable as to 40/70ths in cash and 30/70ths in shares. A further element of the performance related bonus is receivable in the form of options, the shares in respect of which vest two years after the date of grant. The potential entitlement to shares under this element of the scheme, subject to the terms of the scheme, is set out below Bonus 2004 Bonus Market value Market value Shares vesting in at date of grant Shares vesting in at date of grant John Richards 7, , John Bywater 4, , Peter Cole 4, , Gerard Devaux 5, , Simon Melliss 5, , The value of benefi ts in kind includes the use of a company car or provision of a car allowance, medical insurance and life assurance cover as referred to in paragraph 3(i) on page 13. During the year ended 31 December 2005 no payments were made to directors for expenses other than those incurred wholly and directly in the course of their employment or appointment. 17

20 REMUNERATION REPORT CONTINUED 8 Pensions The UK resident Executive Directors all participate in the Company s pension scheme, more fully described in note 6 to the fi nancial statements on pages 32 and 33, which provides pension and other benefi ts. Pension entitlements, which are based on basic salary, are subject to restrictions imposed by the Income and Corporation Taxes Act John Richards and Peter Cole commenced pensionable service with the Company prior to the introduction of these restrictions and are not, therefore, subject to them. In the case of John Bywater and Simon Melliss, pension arrangements to contractual retirement age of 60 are provided under the scheme. In addition, in the case of John Bywater, provision is made by way of an unfunded commitment to ensure a pension of 1/30th of fi nal salary for each year of pensionable service and in the case of Simon Melliss, provision in respect of pensionable salary above the restriction is paid to a money purchase arrangement. Gerard Devaux also participates in the unfunded pension scheme to obtain the same overall level of pension provision as other Executive Directors. No pension arrangements are made by the Company for Non-Executive Directors. The following tables set out information on directors defi ned benefi t pension entitlements, including funded and unfunded arrangements: Increase in accrued Total accrued benefi t Increase in accrued benefi t during the year Age at Years service at at 31 December 2005 benefi t during the year excluding infl ation 31 December December s 000 s 000 s John Richards John Bywater Peter Cole Gerard Devaux Simon Melliss For each director, the total accrued benefi t at 31 December 2005 represents the annual pension that is expected to be payable on eventual retirement, given the length of service and salary of each director at 31 December The increase in accrued benefi t earned during the year represents the increase in this expected pension, including the effect of infl ation, when compared with the position at 31 December The increase in accrued pension excluding the effect of infl ation over the year is also shown. Requirements under: Schedule 7A of the Companies Act 1985 The Listing Rules Transfer value at Transfer value at Transfer value at Value of increase 31 December December 2004 of 31 December 2005 of in accrued benefi t of increase in total accrued benefi t total accrued benefi t during the year accrued benefi t 000 s 000 s 000 s 000 s John Richards 1,643 2, John Bywater 862 1, Peter Cole Gerard Devaux 1,360 1, Simon Melliss For each director, the value of the increase in accrued benefi t under the requirements of Schedule 7A of the Companies Act 1985 is the amount obtained by subtracting from the transfer value of the total accrued benefi t at 31 December 2005 the corresponding transfer value at 31 December The value of the increase in accrued benefi t under the Listing Rules is the transfer value at 31 December 2005 of the increase in accrued benefi t during the period, excluding infl ation. In addition a payment of 101,300 was made to Simon Melliss money purchase arrangement during 2005 (2004: 79,000). 18