2020 Integrated Annual Report

and Consolidated & Separate
Financial Statements

Chairman's statement

Gavin Tipper

A year ago I commented that 2019 had been difficult for property companies. With the South African property index down 45.1% in the 12 months to 30 June 2020, the current year eclipsed that.

We started the year with a weak economy and little prospect of the structural reforms necessary to catalyse growth. Covid-19 then decimated economies around the world and despite substantial levels of economic stimulus, the damage to date has been significant and will take time to repair. Unfortunately, further economic damage is likely to manifest either as a result of the lockdowns to date, actions taken in relation to any second or subsequent waves, or as a consequence of the vast stimulus applied to rebuild economies.

The damage to South Africa's economy as a result of the pandemic, and the lockdowns, was significant and as further data emerges predictions regarding the likely actual damage seem to get worse rather than better. The property industry was severely affected with the retail sector facing unprecedented challenges. The restrictions placed on trading in the initial stages of the lockdown meant that only retailers classified as essential providers were able to trade, and although this was relaxed in subsequent levels of lockdown, many of our shoppers have limited their mall visits, partly as a reaction to the risk of infections in public places and partly for financial reasons.

Financial performance

Distributable income for the year was R1 258 million, a decrease of 34% from 2019. The decrease was the result of Covid-19 impacts, rent reversions in South Africa, the full year impact of the Edcon discount and additional interest costs as a result of the refinancing of US Dollar-denominated debt back into Rands in 2019.

The board has deferred a decision on the settlement of the interim dividend and the payment of the final dividend. As a REIT Hyprop is required to distribute 75% of its qualifying earnings for the year by 31 December 2020, and consideration is being given to options that will allow for the retention of some level of cash by the Company, given the importance of liquidity and lower levels of gearing in these uncertain times.


Our South African portfolio is a generally resilient collection of high quality shopping malls together with some office accommodation. While the impact of the pandemic overshadowed the underlying performance for the year, it was pleasing to see an increase in trading density in the period to February 2020, as well as improvements in a number of other operational metrics. Concerningly, negative rent reversions continued with a combination of low economic growth, an exceptionally competitive retail market and relatively high administered inflation placing significant pressure on our tenants, and affecting their ability to maintain rental levels.

Although the increase in property and other operating expenses was limited to 1%, that was largely a function of reduced activity during the lockdown period. The administered price increases being levied on properties are a concern and unless moderated will discourage investment in retail assets.

The increase in vacancy levels during the year reflected the difficult economic environment, exacerbated by Covid-19.

Encouragingly, we have introduced a number of new tenants that have, and will, bring fresh levels of energy to the properties. The Edcon risk that existed a year ago has largely been addressed through new leases with the buyers of the Edcon assets, albeit at lower rentals, and replacement tenants for limited areas.

The valuation of the South African portfolio decreased by 13.9% over the financial year as a result of rent reversions, and increases in the discount, capitalisation and exit capitalisation rates. We will continue to invest in our properties, with due regard for the uncertain environment and the importance of preserving cash, and while further valuation declines are possible, the health of the balance sheet has been improved and should continue to improve. A groupwide project has been implemented to better position our properties to meet changing shopper needs, to reevaluate the most effective use of space, including space that may become available in future, and to use technology to drive improved returns, thereby supporting long term values.

Eastern Europe

A satisfactory performance for the first half of the year was again negated by the impact of lockdowns on the properties. A large proportion of the income from the portfolio is turnover based and while essential services tenants traded throughout the year, rental income for the period March to June 2020 reduced by Euro 11 million. Hystead did not declare a dividend in the second half of the financial year with earnings instead being retained to provide a buffer.

The operating results for the portfolio prior to Covid-19 were positive and reflected an improving trend, partly as a result of a number of asset management initiatives. We remain focused on increasing the dominance of the malls in their catchment areas and investing to ensure that they are attractive to tenants and are able to retain and grow their shopper bases. Although Eastern Europe has not experienced the same changes to shopping behaviour as the United Kingdom and Western Europe, we recognise that those trends will manifest at some level and the properties need to be adapted accordingly.

Hyprop's agreement with PDI Investment Holdings Limited ends in May 2021 with a further 12 months for implementation of revised terms. Different options in this regard are being considered in the context of the overriding need to limit the addition of further financial risk to the Group balance sheet.

SUB-sAHARAN AFRICA (excluding south africa)

In line with the decision to dispose of the SSA investments, the portfolio has been reduced to a 75% interest in the Ikeja City Mall and holdings in three malls in Ghana. Subsequent to year end key terms were agreed for a sale of the Ikeja City Mall, although subject to a number of conditions.

Various steps were taken this year to improve the management of the properties and thereby to enhance their value, including a restructuring of the ownership of the Ghanian portfolio and an internalisation of the asset management function. As with the other property portfolios, net income was severely affected by Covid-19, and, in addition, foreign currency constraints in Nigeria meant that income from the Ikeja City Mall from December 2019 could not be remitted to shareholders.

The investment in SSA was impaired to recognise decreases in the property valuations. While we will continue to market the properties, there are a limited number of buyers, other than at very opportunistic prices, and we may need to manage the portfolio for some time before we are able to realise it.


We recognise the importance of a sustainable business and of integrating sustainability into the different facets of our operations. Our commitment to being a good corporate citizen pervades our approach to business and we endeavour to act in a responsible, balanced and commercially sensitive manner.

We implemented a revised strategy in 2019 that began to bear fruit in the first part of the financial year. We recognise, however, that some of the changes to the environment as a result of the Covid-19 pandemic may be permanent, or may take a long time to reverse, and have adapted the implementation of the strategy accordingly.

As a specialist retail fund we are conscious of views regarding the imminent demise of retail malls, but believe those views are overstated, particularly in regard to the geographies in which we are invested. We recognise that tenant and shopper needs have changed and will continue to change, and we will innovate to sustain and grow the returns from our assets.

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

Transformation is a priority for South African businesses. Hyprop has made progress in this area by implementing initiatives that benefit our people, our business and the environments in which we operate.

Corporate governance

Hyprop is committed to the highest standards of corporate governance. Details of our governance structures and the extent to which we apply relevant principles of corporate governance, including King IV and regulatory requirements, are set out elsewhere in this report.

Board changes

Early in the financial year Annabel Dallamore joined the board to add a technology perspective to deliberations; she also joined the Audit and Risk and Investment committees.

In July 2020 Spiro Noussis was appointed as an independent non-executive director. Spiro's experience in the Central and Eastern Europe and the United Kingdom property sectors will be of significant benefit to the board in managing the Company's European investments.

We welcome Annabel and Spiro, and look forward to productive relationships with them.

In September 2020 Louis Norval announced that he would be stepping down from the Board at the annual general meeting in November 2020. We thank him for the considerable contribution he made during his tenure.

Mike Lewin retired at the annual general meeting on 2 December 2019. We thank Mike for his contribution to the Group over 9 years and we wish him well in his retirement.


Hyprop, based on the JSE criteria for public shareholders, has a 93% free float. Foreign shareholders owned 14.8% of the Company at 30 June 2020, a decrease from 19% at 30 June 2019. Foreign participation in our equity and bond markets has declined since 2018 and is a clear indication that the economic policies being applied by government are harming investor confidence in our markets.


Covid-19 accelerated a number of trends that had been evident in the domestic environment, including an increase in the number of financially constrained shoppers, retailers operating under margin pressure, a reconsideration by retailers of the amount of space they require, and state and local government entities that have a need to raise ever increasing amounts of revenue. Online shopping has continued to grow and while it is relevant to the South African retail sector, its application is primarily to a relatively limited sector of the population.

We will continue to reposition the business to succeed in the current and likely future environments, but anticipate lower domestic returns until the economy stabilises and a meaningful level of growth returns. We are concerned about the level of debt South Africa has and the consequences for all of us if government does not halt the trajectory of that debt and take the required, bold measures needed to stimulate growth. In the absence of growth, the annual change in GDP per capita will stay negative, worsening an already difficult retail environment.

We have invested in a technology business with the objective of increasing the options available to fill space in our malls and driving "capital light" sources of income from them. We continue to work on creating mixed use precincts around certain of our malls and, where necessary, may invest in related properties.

Considerable levels of stimulus have been injected into the European economy. Although there seems to be a real risk of a second wave of infections and consequent economic restrictions, unlike South Africa, Europe has the ability to address that through further stimulus. The countries in which our shopping centres are located performed reasonably this year and with the relaxation of lockdown restrictions, turnovers and foot counts at the malls recovered, albeit to levels below those of the previous year. We anticipate constrained returns until global economies stabilise after which the properties should produce attractive earnings growth.

As a result of the current environment an exit from the SSA portfolio may take longer than originally envisaged. A substantial portion of the US Dollar debt was refinanced in Rands in 2019 and 2020, and the remaining Dollar debt will be settled from the proceeds on sale of the Ikeja City Mall. Having somewhat derisked the portfolio, we will work to optimise the balance between reinvestment to maintain and enhance property values, and extracting returns, until the portfolio is sold.

South African retail property companies have experienced a difficult period with stagnant economic growth, high levels of administered inflation and changing shopper behaviour. All of this has placed pressure on rentals, affecting the returns available from property assets, and hence their values. In the absence of meaningful levels of debt reduction, which often did not occur as property companies distributed all of their earnings, lower property values place pressure on loan to value covenants. Hyprop refinanced a large portion of its US Dollar debt into Rands a year ago and anticipates settling the balance during the next financial year, thereby addressing some of the currency risk on the Group debt.

Subject to agreement with our partner in Hystead, we intend to restrict distributions from Hystead for an initial period of two years and instead apply the funds to reducing the Hystead equity debt. We have previously announced a reduction in the distribution rate at Hyprop level, we will limit capital expenditure where practical and we will continue the drive to reduce costs. These initiatives will strengthen the balance sheet and provide a reasonable level of headroom even if there are further declines in property valuations and the Rand weakens against the Euro.

Hyprop owns an enviable portfolio of properties in South Africa and in Eastern Europe. While shopping patterns are evolving, well run and relevant malls will continue to deliver attractive returns. We are confident that Hyprop is well positioned to compete in the environment we face, to benefit from any growth that may happen and to take advantage of opportunities that arise.


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

Gavin Tipper
Chairman of the board