2019 Integrated annual report

and consolidated and separate financial statements

Risk management

Hyprop views risk management as a core competency critical to sustainability. The group employs a structured and disciplined approach to group-wide risk management, with the objective of maintaining a balance between risk and value creation.

The primary objectives of the Hyprop risk management process are to ensure that risk awareness is embedded in strategy discussions at board level, in day-to-day operations and processes, and that uncertainty regarding operational performance is minimised by anticipating surprises and associated costs and losses.

Risk management forms an integral part of normal operations, processes and activities, and a culture of risk awareness endures. The group also monitors and reports on industry risk trends.

  • Ultimate responsibility for risk
  • Determines risk tolerance
  • Collates and reviews reports from management, the independent internal audit service provider, PricewaterhouseCoopers, internal audit function and the external auditor
  • Coordinates the internal audit efforts with those of the external auditors
  • Identifies, assesses, measures, monitors and reports risks
  • Implements controls to safeguard assets and to ensure the validity, accuracy and completeness of financial information
  • Implements the risk management system
  • Reviews management's implementation and the adequacy of controls and reports thereon
  • Reports on industry risk trends to the audit and risk committee
  • Submits an annual internal audit plan and reports on progress thereon
  • Reports the results of reviews with opinions and recommendations for improvements
  • Reviews the implementation and adequacy of controls relating to financial information at a statutory reporting level

Key principles

Hyprop's approach to risk management is based on several key principles:

Risk tolerance

Risk tolerance is at the core of the risk management framework. By definition, risk tolerance specifies how much risk an organisation is willing to accept in the pursuit of its business objectives. At Hyprop, risk will not be tolerated in the instances where, if the risk event were to occur, it could cause any one, or more, of the following:

These underlying risk tolerance principles are encoded in Hyprop's formal working documents and processes, for example:

Summary of key risks

Risk number Key risk Strategic objective Impact Strategic response/mitigation Changes to risk in the
reporting period

Low GDP growth impacts business growth in South Africa

Focus on sustainable distributable income growth

Slower retail sales growth affects retailers' financial positions and ability to pay rent

  • Hyprop shopping centres are well established, in dominant locations and attract flagship stores
  • Maintain relevance of malls by optimising tenant mix, entertainment and other offerings
  • Improve customer interaction through technology


Slowing consumer spend affects retailers' trading densities and rent-to-turnover ratios

Focus on sustainable distributable income growth

Leases not renewed; discounted rentals to retain tenants; tenants more cautious on renewals and new lettings; tenants taking less space, increase in vacancies, slower extension plans

  • Contractual lease income with financially sound tenants (most are reputable national companies with strong balance sheets and proven business models)
  • Model for sustainable rental growth to reduce reversions
  • Manage total cost of occupancy for tenants


Downgraded sovereign credit rating (South Africa)

Focus on sustainable distributable income growth

Increased borrowing costs

  • Reduce LTV ratio
  • Interest rate hedging policy adopted by the board
  • Minimum of 75% of interest rate exposure on borrowings is hedged


Significant volume of leases expiring in any one year

Focus on sustainable distributable income growth

Increase in vacancies, impact of rent reversions

  • Stagger quantum and value of leases expiring on an annual basis
  • Enhance properties to increase their relevance and attractiveness to tenants


Maintenance and capital improvements

Continuous portfolio improvement and maintaining relevance of Hyprop's malls

Compromised use/functionality of the building and increased maintenance burden/higher operational costs

Malls lose relevance and become outdated

  • Project income budgets are based on deals concluded (signed and accepted development offers)
  • Use reputable consultants, contractors and professionals with experience
  • Ongoing review of design, and monitoring of construction, by development and centre management and the project team


Credit rating downgrade (Hyprop)

Optimise funding and restore investment grade credit rating

Inability to raise funding on competitive terms

Increased cost of borrowings

  • Restore investment grade credit rating by reducing LTV ratio and maintaining adequate liquidity to refinance short-term debt
  • Maintain conservative gearing levels
  • Maintain high interest cover ratio


Potential increase in interest rates

Managing exposure to interest rate fluctuations

Increased borrowing costs result in reduced distributable income

  • Interest rate hedging policy adopted by the board
  • Minimum of 75% of interest rate exposure on borrowings is hedged


Negative impact of disrupted electricity supply on the economy and at Hyprop shopping centres

Negative impact of disrupted water supply at shopping centres

Increased cost of occupancy from rates, taxes and utilities

Ensure continuous supply of electricity

Reliable supply of water services

More efficient and effective utility cost management

Prolonged electricity and water outages mean sub-optimal trading conditions

Excessive increases in cost of occupancy impacting recoveries, renewals and sustainable income growth

  • Introducing smart metering; energy-saving initiatives
  • Implement alternative water supplies and savings initiatives
  • Solar photovoltaic plants at Hyprop's malls

Numerous projects under way to reduce consumption:

  • Tenants guided by tenant criteria document, with guidelines on reducing electricity consumption
  • Objections to high increases in municipal rates
  • Working closely with professional consultants to optimise local authority approval processes and minimise the negative impact of billing errors
  • Lobbying through SAPOA to reduce high tariffs
  • Working with central improvement districts (CIDS) to improve services and reduce costs


Digital disruption

Embrace technology to enhance the profitability of our shopping centres

Inefficient business processes through under-utilisation of technology

Digital disruption impacts performance of retail tenants' business

Loss of contact with shoppers

  • Embrace digital disruption
  • Develop revenue streams from non-tangible assets


Multi-currency and refinancing risks associated with the group's funding structure and gearing

Optimise funding and restore investment grade credit rating

Excessive gearing resulting in credit rating downgrade

Increased LTV due to devaluation of the Rand

Increased cost of borrowing due to currency mismatches

Ability to refinance maturing debt

  • Matching currency between borrowings and assets/income to service borrowings
  • Interest rate hedging policy adopted by the board
  • Optimum capital allocation
  • Maintain available bank facilities and strong relationships with lenders


External risks (outside the control of management)
Increased Decreased Remained the same  
External risks (can be mitigated by management)
Internal risks (under the control of management)