CHAIRMAN’S REPORT

2015 IN PERSPECTIVE

The South African listed property sector produced a total return of 27% for the year to 30 June 2015 and the FTSE/JSE REIT index delivered a return of 22%.

Hyprop’s return for the same period was
59%

Gavin Tipper, chairman

We live in interesting times. As we anticipate interest rate rises in the UK and US, Chinese stock markets have fallen, economic news flow from that country is largely negative and its currency has been devalued to support the economy. The devaluation was limited, but conclusions on the impact of lower Chinese demand on world markets have impacted global growth projections and, more specifically, emerging market currencies. Some progress has been made in addressing the issues Europe faces, but it is likely to be some time before certain of the more troubled economies in the European Union are stabilised and interest rates can return to more normal levels.

The South African economy is stuttering. Growth is too low to address the chronic unemployment problem. Load shedding and unionised labour hinder business’ ability to create jobs and there is an absence of leadership from government. The economy depends heavily on a relatively small tax base and unless we are able to develop and grow that tax base, the consequent lack of available funding will erode even more aspects of what are perceived as normal attributes of a functioning economy.

Despite uncertainties in the global economy and the obvious difficulties locally, the domestic property sector has performed strongly over an extended period. Many of the listed counters produce significant real returns and the sector has seen some of the consolidation we expected, as well as new listings. The South African listed property sector produced a total return of 27% for the year to 30 June 2015 and the FTSE/JSE REIT index delivered a return of 22%. Hyprop’s return for the same period was 59%.

Hyprop’s domestic portfolio performed well during the period. Despite the pressure on South African consumers, retailers in our centres produced strong results and we see pleasing demand for space in the malls. As reported elsewhere, we were able to accommodate some of this demand through a series of developments in our centres.

The financial state of certain South African retailers featured extensively in the press during the year; we have replaced some tenants with stronger covenants who were waiting for space, and will continue to work with those who have not defaulted.

The redevelopment of Rosebank Mall was completed early in the period and the mall has traded well since opening. We made various investments in the remainder of our properties and there is an exciting pipeline of opportunities that will be completed as appropriate to the properties and our tenants.

The South African market for properties that suit our portfolio is limited, with few sales and transactions at high prices where they take place. We disposed of a number of non-core assets during the period and are considering approaches on some remaining non-core assets.

The non-South African portfolio performed in line with expectations. Manda Hill and the Accra Mall traded well; West Hills Mall in Accra opened during the period with strong footfall, but lower trading densities than targeted, and the remaining developments are proceeding. Although the current weakness in the Ghanaian economy has had a minimal effect on our trading malls, we have elected to delay further developments on existing properties.

We will continue to consider acquisitions in Africa and other emerging markets where assets of appropriate quality become available at acceptable yields.

Hyprop produced a strong financial performance for the year, with the distribution for the second six-month period increasing by 16,3% over the comparable period in 2014 and the annual distribution rising by 15,0%. Results for the year benefited from increased income from Rosebank Mall, the net benefit of income from the Somerset Mall over the lost Sycom income, tight control of operating expenses and effective management of the interest expense.

The level of foreign shareholding in Hyprop increased substantially during the period. While this was common to many South African REITs, it was also influenced by Hyprop’s inclusion in the Morgan Stanley Capital International MSCI emerging market index from end-May 2015.

Outlook

Although certain international economic agencies are forecasting slightly higher levels of growth for South Africa in the medium term, current growth levels are concerning and predicted improvements are well short of what is required to address the fundamental problems in the economy.

We will continue to invest in our portfolio to ensure our properties remain destinations of choice for consumers. We have an enviable mix of retailers and work hard to support their growth in our properties. Demand for space in our malls remains strong and, with the right investment, these assets should provide attractive returns for the foreseeable future, despite constraints in the macro-economy. We expect the African portfolio to perform solidly, particularly as the West Hills Mall gains traction and trading densities improve. We continue to investigate appropriate opportunities in Africa and other emerging markets.

The macro-economic context in which we operate dictates a cautious outlook and a number of commentators on the listed property sector are arguing for substantially more muted growth in future than in recent years. Despite this, we believe our portfolio is well structured with sufficient tenant depth to produce satisfactory returns over the medium term.

Sustainability

We recognise the importance of a sustainable business and of sustainability in the different facets of our business.

Our commitment to being a good corporate citizen pervades our approach to business and we endeavour to act in a responsible, balanced and commercially sensible manner. As such, we ensure our business model is sustainable and that it remains relevant to the economies we operate in.

We are conscious of our impact on the environment and have been measuring and mitigating that impact for a number of years. We have made meaningful progress and our process has become increasingly sophisticated, with demanding goals and tight accountability for outcomes.

Transformation is a priority for successful South African businesses. Hyprop has demonstrated regular improvement in this area and while our rating will be affected by the new codes and their impact on the property charter, we will continue to implement initiatives that yield sensible and sustainable outcomes.

Corporate governance

Hyprop is committed to the highest standards of corporate governance. This integrated report sets out details of our governance structures and the extent to which we comply with relevant codes of corporate governance and regulatory requirements.

Board changes

There were no changes to the board or to its committees during the review period, other than Mike Lewin taking the chair of the social and ethics committee.

Appreciation

On behalf of the board, I thank our executives, management and staff for their efforts during the year. I also thank our stakeholders for their support, and my fellow board members for their contributions.

Gavin Tipper
Chairman

 
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Website: www.hyprop.co.za

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