Hyprop has a 60% interest in Hystead, a UK-based property investment company. The effective date of the investment was 3 December 2015.

The shareholders’ agreement between Hyprop and the 40% shareholder (PDI investment Holdings Limited) includes reserved matters and voting rights such that Hyprop has joint control of Hystead. Hystead invests, directly or indirectly, in shopping centres in Europe.

In prior years, management assessed the provisions of the Hystead shareholders’ agreement and considered whether the investment should form part of joint ventures and be equity accounted or whether the contractual right to receive dividends should be accounted for as a financial asset. The contracts in place give rise to a financial obligation in the Hystead entity to pay dividends.

Accordingly, Hyprop has accounted for this investment as a financial asset and classified the investment as such. During the current year, Hystead acquired AP Retail in Sofia, Bulgaria and Manta in Zagreb, Croatia. Management reassessed the classification and accounting treatment of the investment in Hystead and concluded that the classification as a financial asset remained appropriate.

The fair value of Hyprop’s investment in Hystead was initially determined as R1,5 billion (EUR89,8 million) at the date of acquisition. The day-one gain of R1,5 billion was deferred (in accordance with IFRS), as the valuation method included assumptions derived from unobservable inputs. Subsequently the day-one gains on all acquisitions have been treated in the same manner and deferred. Subsequent fair value movements in the financial asset are recognised, resulting in a total deferred gain of R3,8 billion (EUR235,5 million) at year-end.

In return for credit enhancement provided to PDI by Hyprop, Hyprop receives an increased right to dividends from Hystead (disproportionate to its shareholding), while the guarantee is in place (refer to note 8 – Financial guarantees).

The fair value of Hyprop’s investment in Hystead at 30 June 2018 was based on its right to receive estimated dividends from Hystead as a result of its ownership of 60% (2017: 60%) of the company as well as its right to the credit enhancement fee, equivalent to a further shareholding of 11% (2017: 18%) until the expiry of the shareholders’ agreement in May 2021.

The most significant inputs to the valuation process, all of which are unobservable, are the discount rate and the exit capitalisation rate. The estimated fair value increases if the discount rates and exit capitalisation rates decline or if the growth rates increase.

The inputs used in the valuations at 30 June 2018 were:

• Growth rates between (17,8%) and 0,6% with a weighted average of (0,3%)
• Discount rates between 7% and 8% with a weighted average of 7,4%
• Exit capitalisation rates between 5,3% and 7,3% with a weighted average of 6%
• Terminal growth rates between 0,8% and 2% with a weighted average of 1,5%.