Risk management

GROUP OVERVIEW

Risk management

The material risks identified by the group in terms of their probability and potential impact on Hyprop are shown below. Each risk has been mapped to the strategic objective on which it could have an impact, affected stakeholders, management’s strategic response and related key performance indicators

Approach

Hyprop’s system of internal control is designed to provide reasonable assurance as to the integrity and reliability of the financial statements. By managing rather than eliminating applicable risks, these systems are intended to safeguard, verify and maintain accountability of the company’s assets. Equally, they are designed to identify and minimise significant fraud, potential liability, loss and material misstatement, while complying with applicable laws and regulations.

Framework/process

The board reviews and monitors the efficacy of systems of internal control, assisted by the audit and risk committees. These committees in turn are assisted by management reporting and periodic reviews, as well as reports from an outsourced internal audit service provider. The committees report to the board on the findings of the internal audit function.

Executive management implements controls to ensure the validity, accuracy and completeness of financial information. These controls are reviewed by internal and external audit. External audit reports on the fair presentation of financial information at statutory reporting level. On an operational level, this is done by the executive committee.

The risk committee

The risk committee is constituted as a subcommittee of the board. The committee has an independent role, operating as an overseer and makes recommendations to the board for its consideration and final approval. The committee does not assume the functions of management, which remain the responsibility of the executive directors, officers and other members of senior management. The role of the committee, inter alia, is to adopt and implement an appropriate risk management policy, which is in accordance with industry practice. For further detail in respect of the role and mandate of the risk committee, please refer to the risk committee charter online.

View enlarge version of the table

    Strategic
objective
  Key risk   Probable effects   Severity
of risk
  Stakeholder   Strategic response/mitigation   Key performance indicator
  Focus on sustainable income growth   Low GDP growth impacts business growth in South Africa  
Bullet Slower retail sales growth affects retailers’ financial positions and ability to pay rent
  High  
Bullet Providers of capital (debt and equity investors and financial institutions)
Bullet Tenants
Bullet Mall customers
 
Bullet Facilitate strong trading environments by developing shopping destinations of choice, offering an attractive tenant mix with exciting brands and flagship stores in a safe, clean and friendly environment
  Arrears, trading densities, rent affordability
    Slowdown in consumer spend affecting retailers’ trading densities and rent ratios  
Bullet Small line stores under pressure
Bullet Leases not renewed
Bullet Discounted rentals to retain tenants
Bullet Lower distributable income
  High  
Bullet Tenants
Bullet Providers of capital (debt and equity investors, financial institutions)
Bullet Mall customers
 
Bullet Hyprop malls are well established, in dominant locations and often attract flagship stores
Bullet Contractual lease income with financially sound tenants (most tenants are reputable national companies with strong balance sheets and proven business models)
Bullet Increase shopper time spent in malls, through initiatives such as wi-fi and active marketing and social media strategies
Bullet Provide geographic diversification (eg sub-Saharan expansion)
  Arrears, trading densities, rent affordability
    Potential increase in interest rates  
Bullet Increased borrowing costs result in reduced distributable income
  Low  
Bullet Providers of capital (debt and equity investors and financial institutions)
 
Bullet Increased borrowing costs result in reduced distributable income
Bullet 94,5% of debt fixed for 5,2 years, and staggered fixed interest rate
Bullet Proactive management of interest-bearing borrowings
  Maturity profile, cost of funding
    Downgrading of sovereign credit rating  
Bullet Growth and national/global competitiveness at risk
Bullet Reduced foreign direct investment
Bullet Increased borrowing costs
  Medium  
Bullet Providers of capital (debt and equity investors and financial institutions)
 
Bullet Provide economic and geographic diversification through sub-Saharan investments
Bullet High ratio of fixed debt
Bullet Introduction of unsecured debt in the form of debt capital market funding (DCM)
  Distribution growth
  Focus on sustainable income growth   Increased supply of retail space in the market  
Bullet Discounted rentals to retain tenants
Bullet Tenants become more demanding on leasing terms
Bullet Increased vacancies
Bullet Leases not renewed
Bullet Increased pressure on renewal terms
Bullet Lower rental growth
  High  
Bullet Tenants
Bullet Providers of capital (debt and equity investors, financial institutions)
Bullet Mall customers
 
Bullet Meet tenant demand through extensions and tenant relocations
Bullet Demand for space in Hyprop centres continues to outstrip supply, resulting in a strong pipeline of prospective tenants
Bullet The executive committee meets monthly to discuss operational performance
  Leasing activity, rental growth, contractual escalations, workload (percentage of total leases expiring in one financial year)
    Tenants more cautious on renewals and new lettings  
Bullet Inability to renew leases or retain tenants means increased vacancies and prolonged periods of vacant space in shopping centres
  Medium  
Bullet Tenants
Bullet Providers of capital (debt and equity investors, financial institutions)
Bullet Mall customers
 
Bullet Close engagement with tenants throughout their tenure
  Workload
    Tenants taking less space and slower extension plans  
Bullet Negative impact on budgets
  Medium    
Bullet Stagger major lease expiries
 
    Significant volume of leases expiring in any one period  
Bullet Negative rent reversion
  Medium    
Bullet Proactively manage lease expiries
 
    Lease renewals and tenant retention  
Bullet Discounted rentals to retain tenants
  Medium    
Bullet Ensure a strong pipeline of prospective tenants
 
    Restrictive clauses in leases  
Bullet Discounted rentals to retain tenants
  Medium    
Bullet Monthly lease expiry and related workload reports to executive committee
 
  Continuous portfolio improvement   Dilutionary acquisitions, developments and disposals  
Bullet Lower growth in distributions
  Medium  
Bullet Providers of capital (debt and equity investors, financial institutions)
 
Bullet Regular review of strategy against macro-economic environment, operating landscape, returns and risk tolerance
Bullet Disposal of non-core assets
  Approved investments and disposals with long-term growth objective
  Capital budget exceeded for development/redevelopment  
Bullet Project yield compromised
Bullet Inefficient capital allocation
  Medium    
Bullet Monthly monitoring of capital expenditure
Bullet Detailed analysis and research prior to approval
 
  Ineffective progress monitoring for development/redevelopment  
Bullet Project end date being compromised, escalating project costs and the yield being compromised.
  Medium    
Bullet Meet pre-letting requirements
Bullet Ongoing review of design and monitoring of construction by development and centre management and the project professional team
 
  Attracting and retaining the best people   Current BEE level of 6  
Bullet Major tenants prefer landlord to have reasonable BEE rating
Bullet Potential impact on corporate activity in SA
Bullet Potential for regulatory penalties
  High  
Bullet Providers of capital (debt and equity investors, financial institutions)
Bullet Employees
Bullet Suppliers
Bullet Tenants
 
Bullet Identified as a strategic imperative. Plan in place to achieve incremental and sustainable improvements
  Independent BEE rating
    Negative impact of the new codes          
    Transformation required in ownership, directors and senior management          
  Operating an environmentally sustainable business   Potential introduction of carbon tax in 2016  
Bullet Increased operational costs
  High  
Bullet Tenants
Bullet Community
Bullet Employees
Bullet Suppliers
 
Bullet Environmental, social and governance (ESG) strategy document serves to provides context and guidelines for implementation
  Improved energy efficiency
    Failure to meet primary targets (for energy, water, recycling and carbon consumption)  
Bullet Possible reputational damage with the investment community
 
  Providing the highest level of service to our tenants   Increased cost of occupancy due to electricity price increases  
Bullet Unable to recover tenants’ portion of consumption means lower distributable income
  High  
Bullet Mall customers
Bullet Tenants
Bullet Municipal authorities
 
Bullet Numerous projects under way to reduce consumption
  Cost of occupancy – electricity consumption
    Negative impact of disruptive electricity supply on the economy and at Hyprop malls  
Bullet Lower rentals to retain certain tenants
Bullet Prolonged periods of power outages resulting in sub-optimal trading condition
     
Bullet Successful objection to incorrect valuations
Bullet 1 500kWp, solar photovoltaic plant at Clearwater Mall
 
    Increase in capital cost to provide more generators  
Bullet Increased electricity and diesel costs
     
Bullet Introducing smart metering
Bullet Energy-saving and similar initiatives
 
  Providing the highest level of service to our tenants   Increased cost of occupancy from rates, taxes and utilities  
Bullet Cost and supply of electricity and water
Bullet Excessive increase in cost of occupancy impacting recoveries and renewals
  Medium  
Bullet Tenants
Bullet Mall customers
Bullet Providers of capital (debt and equity investors, financial institutions)
 
Bullet Numerous projects under way to reduce consumption
Bullet Tenants guided by tenant criteria document, with guidelines on reducing electricity consumption
Bullet Introducing smart metering
  Cost of occupancy – water, rates and electricity consumption
    Deterioration of municipal administration and service delivery  
Bullet Incorrect utility billings
Bullet Delays in transfer of acquisitions and disposals
Bullet Inadequate services provided
Bullet Billing errors
Bullet Excessive lead times for town planning approval
  High  
Bullet Tenants
Bullet Providers of capital (debt and equity investors, financial institutions)
Bullet Mall customers
 
Bullet Working closely with professional consultants to optimise local authority approval processes and to minimise negative impact of billing errors
  Town council approvals received, utilities recovered
  Providing the highest level of service to our tenants   Increased levels of crime at shopping centres  
Bullet Hyprop forced to spend more capital on security equipment
Bullet Crime, robberies, theft, etc at shopping malls
Bullet Negative impact on footfall
Bullet Reputational damage for Hyprop and for its malls
  High  
Bullet Mall customers
Bullet Tenants
Bullet Community
 
Bullet Improve quality of service provider and security equipment
Bullet Better engagement between shopping centre staff, service provider, community and local police
  Improvement in crime statistics at shopping malls
  Increase portfolio and geographic diversification   Weakening of currencies placing local tenants under pressure  
Bullet Unable to repatriate funds due to illiquid currency markets or capital restrictions
Bullet Reduced distributable income
Bullet Excessive volatility in exchange rates
  High  
Bullet Tenants
Bullet Mall customers
Bullet Providers of capital (debt and equity investors, financial institutions)
 
Bullet Matching debt with income (USD)
Bullet Consider hedging exposure in terms of material dividends received
  Size of dividend (current percentage of income)
    Slowdown in consumer spend  
Bullet Small line stores under pressure
Bullet Leases not renewed
  High  
Bullet Tenants
Bullet Mall customers
Bullet Providers of capital (debt and equity investors, financial institutions)
 
Bullet Hyprop malls are well established, in dominant locations and often attract flagship stores
Bullet Strong lease agreements with financially sound tenants (most tenants are reputable national companies with strong balance sheets and proven business models)
  Arrears, trading densities, rent affordability


 
REGISTERED OFFICE AND BUSINESS ADDRESS

Registration number: 1987/005284/06
2nd Floor, Cradock Heights, 21 Cradock
Avenue, Rosebank, 2196
PO Box 52509, Saxonwold, 2132
Tel: +27 11 447 0090
Fax: +27 11 447 0092
Website: www.hyprop.co.za

  INTERACTIVE CHARTING

The interactive graph tool allows you to compare data for various elements over the last 5 years. You are able to choose data from the "Five year financial review tables.





start tool
  E-BOOK

Use the following link to view the E-Book.

view e-book