Chief executive officer’s report

Chief executive officer: Pieter Prinsloo

The past year was a landmark period for Hyprop in terms of corporate activity. It was the first year of operating under new REIT legislation and the company strengthened its portfolio by acquiring two quality shopping centres, Somerset Mall in the Western Cape and Manda Hill in Lusaka, Zambia. The portfolio was further enhanced by disposing of indirect investments in South Africa, including our investment in Sycom and Mantrablox.

We will continue to pursue the disposal of non-core assets including the stand-alone office portfolio and retail assets, Stoneridge Centre, Willowbridge and CapeGate Lifestyle. Proceeds from these disposals will be applied against refurbishments and extension projects, as well as reducing debt.

In addition, Hyprop’s free float increased to 100% following the exit of Redefine in October 2013.

The core portfolio of large and super-regional shopping centres proved resilient, with strong net income growth despite a slow economy. This was supported by a strong operating performance including:

	A consistently high occupancy rate of 97,6%
	Contained property expenses at a cost-to-income ratio of 34,4%
	Strict control over rental arrears at 0,4% of rental income
	Trading density growth and rent affordability remaining steady at 7% and 6,9% respectively, despite a weakening trade environment

The net result was 9,5% like-for-like growth in distributable earnings from regional, large and super-regional malls (excluding Rosebank and Somerset malls). Hyprop exceeded its full-year guidance of between 8,5% and 10,5% to achieve distribution growth of 11,3%.

Developments

Our strategy is to continuously improve and maintain the quality of Hyprop’s existing portfolio through redevelopments, extensions and refurbishments.

Redevelopments relate to extensive refurbishments to modernise shopping centres in line with evolving customer and retailer needs. The Rosebank Mall has undergone a two-year redevelopment project at a capital cost of R932 million, which was completed in September 2014. In addition to new retail tenants, the centre was completely refurbished with new lifts, escalators, restrooms, mall finishes and additional parking. Further detail on Rosebank Mall can be found on page 33.

Extensions are tenant-driven enlargements of existing stores or the entry of new stores. During the year, Edgars stores were extended at The Glen and Canal Walk while the extension of Woolworths at CapeGate was completed. In line with Hyprop’s strategy of maintaining a quality shopping centre portfolio, several projects are under way across the portfolio.

Development projects completed/under way

Various high-end tenants, Hyde Park Corner

Hyde Park Corner will be introducing a number of leading international brands in November 2014, including pre-eminent fashion brands that have chosen to launch their South African presence in Hyde Park Corner. These include: high-end Italian couture house, Versace; French leather goods and accessories group, Longchamp; and country-living inspired UK fashion label, Jigsaw. Other new tenants will include UK designer, Paul Smith, Italian fashion brand, Emporio Armani, and premium coffee label, Nespresso. In addition to global fashion brands, the centre will also open a flagship Edgars Cosmetics Gallery, a unique new concept store offering a broad range of high-end cosmetics.

Refurbishments are undertaken to refresh and upgrade existing facilities. Restrooms at Hyde Park Corner and Atterbury Value Mart were refurbished during the year and equipment totalling
R27,9 million replaced. This will contribute to lower maintenance costs and improved environmental efficiencies.

Sub-Saharan Africa (excluding SA)

Since the inception of Atterbury Africa in 2012, Hyprop has invested R812 million in the African initiative. As part of the first development, the largest shopping centre in Accra, Ghana — West Hills Mall — will open in October 2014. Construction of Achimota Mall, also in Ghana, began during the year and is due for completion in October 2015.

In December 2013, Hyprop together with Attacq acquired premier shopping centre, Manda Hill, in Lusaka, Zambia through the acquisition of African Land.

Atterbury Africa has made strong inroads on the continent and has a solid pipeline of developments set for completion over the next two years. It is well placed to become a leading shopping centre fund across Africa. Post-year-end, African Land was integrated into Atterbury Africa and the combined entity will be known as AttAfrica.

Leasing

In terms of leasing, 2014 was a reasonably active year with 278-leases signed in South Africa, equating to 135 000m² (17% of total portfolio by GLA). Due to strong demand for space and low vacancies in the core portfolio, lease terms remained favourable and the portfolio recorded rental growth of 8,3% (2013: 6,3%) and contractual escalation of 8,2% (2013: 7,4%). We continued to see strong interest from international brands seeking to establish their presence in South Africa across the Hyprop portfolio. Post-year-end, we opened the first River Island and Forever 21 stores in South Africa. Establishing a relationship with leading international fashion brands aligns with our strategy of driving an appealing tenant mix and offering shoppers access to popular leading labels.

The workload for financial year 2015 increases to 25% of the total portfolio by GLA, equal to 200 000m². Shopping centres most affected are CapeGate, Clearwater and The Glen. Although many tenants will exercise their option to renew their leases, this gives us an opportunity to replace underperforming tenants and upgrade or enlarge national tenants to retain flagship status.

Hyprop is concerned about exclusivity clauses inherited in some supermarket leases. As shopping centre owners, we must honour these clauses while providing shoppers with variety and choice. We believe exclusivity clauses have no place in a maturing retail-market and we support the Competition Commission’s investigation of the anticompetitive effects of these outdated clauses.

Sustainability

There is greater focus globally to introduce sustainable energy-saving initiatives as natural resources become increasingly rare and costly. In South Africa, higher electricity tariffs have made the introduction of green energy increasingly viable and will simultaneously reduce carbon emissions across the portfolio. A number of projects aimed at improving energy efficiency were completed during the year. To date, these initiatives have saved 4,9 million kWh with cost savings of R5,9 million. During the next financial year, Hyprop will introduce smart metering to further improve monitoring. In addition, a 500kWp solar photovoltaic plant will be installed at Clearwater Mall. More detail on these projects can be found on page 47.

Connecting with consumers

The advent of online shopping and its impact on our shopping centres is a topical issue that is addressed internally and forms part of our engagement with tenants. Online shopping in South Africa has gained little traction due to limited bandwidth, vast geographic distances that restrict delivery to large cities and a strong shopping centre culture. As a result, online shopping is currently less than 1% of total retail sales. This is also being influenced by international retailers seeking to penetrate the untapped African market and doing so through flagship brick-and-mortar stores in large, dominant shopping centres. In the long term, online shopping is expected to increase as bandwidth improves and urbanisation increases. However, it is unlikely that stores will be cannibalised by online shopping in their entirety, particularly food and fashion. Feedback from our tenants indicates that they will enhance their stores to embrace technology and improve the shopping experience.

Technology is at the forefront of connecting with consumers. Over the years, Hyprop has introduced technology to help drive footfall and increase dwell time, mainly through mobile applications. All our shopping centres now have a strong presence on social media platforms such as Facebook, Twitter, Instagram and YouTube. During the year, high-speed wi-fi was introduced across the portfolio with 88 000 registered users to date. To support spend, gift cards are being introduced at Clearwater, Woodlands, CapeGate and Somerset malls.

Post-year-end, mall security has come under scrutiny. Security is a priority for the group and our security strategies are proactively reviewed to ensure we adopt the latest technologies, effectively deploy current resources, identify and address vulnerable areas and collaborate with tenants, the South African Police Service and other business organisations. For now, we are working closely with our service providers to adjust our security strategies accordingly to prevent crime.

Strategy and focus

Looking forward to the next financial year, economic trading conditions are expected to remain subdued. Given the mature shopping centre market in South Africa, Hyprop will maintain its leading position by improving the quality of its core portfolio while disposing of non-core assets.

As proven with the acquisition of Manda Hill, Hyprop has the balance sheet strength and ability to quickly capitalise on appropriate opportunities in South Africa and the rest of Africa.

Word of appreciation

My gratitude to our board members for their wise counsel and support. I thank the executive team and all our employees for their dedication and hard work, our loyal service providers and our tenants for their continued support.

Pieter Prinsloo
Chief executive officer