The following properties have been pledged as security by means of mortgage bonds (refer to note 17 – Borrowings):

To Rand Merchant Bank (a division of FirstRand Bank Limited) to secure borrowing facilities totalling R200 million and USD30 million: A 40% undivided share in Canal Walk.

To Stanbic IBTC Bank PLC to secure borrowing facilities totalling USD36,2 million:
Ikeja City Mall

To Investec Asset Management Proprietary Limited to secure borrowing facilities totalling USD27,2 million:
Ikeja City Mall

Encumbered properties total R20,8 billion (2015: R24.3 billion).

Subsequent to year-end, Nedbank began a process of reeasing the bonds over Woodlands Boulevard, Clearwater Mall and Willowbridge South, after R1,2 billion of existing debt facilities matured and were repaid, being replaced with debt capital market funding (corporate bonds). Refer to note 36 — Capital management and note 37 — Events after the reporting date.

More than one independent valuer may be used to provide the valuation. Investment property is reflected at fair value at 30 June 2016.

The portfolio was valued at R28,8 billion at 30 June 2016 (2015: R25,0 billion), excluding property held-for-sale. The portfolio was valued by two independent, professionally qualified property valuers:

The valuers work independently of each other and their valuations are combined to arrive at the value of the full portfolio.

The significant inputs and assumptions in respect of the valuation process are developed in close consultation with management.

The valuation process and fair value changes are reviewed by the audit committee and the board of directors at each reporting date. The directors confirm that there have been no material changes to the assumptions applied by the registered valuers.

The average annualised resultant portfolio income yield produced by the valuers was 7,2% (2015: 6,9%). The average annualised resultant yield range across all properties was 6,5% to 11,0% (2015: 6,3% to 9,9%).

The most significant inputs to the valuation process, all of which are unobservable, are the estimated rentals at the end of the lease, assumptions regarding vacancy levels, the discount rate and the reversionary capitalisation rate. The estimated fair value increases if: the estimated rental increases, vacancy levels decline or if discount rates (market yields) and reversionary capitalisation rates decline.

Changes in discount rates attributable to changes in market conditions can have a significant impact on property valuations.

A 25 basis point increase in the average discount rate will decrease the value of investment property portfolio by R674 million (2,1%).
A 25 basis point decrease in the average discount rate will increase the value of investment property portfolio by R703 million (2,2%).
A 25 basis point increase in the capitalisation rate will decrease the value of investment property portfolio by R1,21 billion (3,7%).
A 25 basis point decrease in the capitalisation rate will increase the value of investment property portfolio by R1,30 billion (4,0%).

Valuation techniques underlying management’s estimation of fair value

The valuations were determined using discounted cash flow projections. These inputs include:

    Future rental cash flows: Based on the location, type and quality of the properties and supported by the terms of any existing leases or other contracts or external evidence such as current market rentals for similar properties.

    Discount rates: The discount rate is the rate of return used in a discounted cash flow analysis to determine the present value of future cash flows, and take into account an assessment of the uncertainty in the amount and timing of future cash flows.

    Vacancy rates: Based on current and expected future market conditions after expiry of any current leases, as well as tenant failures during the course of a lease.

    Maintenance costs: Including necessary investments to maintain functionality of the property for its expected useful life.

    Capitalisation rates: Based on location, size and quality of the properties and taking into account market data at the valuation date.

    Terminal value: Taking into account assumptions regarding maintenance costs, vacancy rates and market rentals.

    The valuation methods applied by the independent valuers were the same as the prior year.

Fair value hierarchy
Fair value is the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date, regardless of whether that price is directly observable or estimated using another valuation technique. In estimating the fair value of an asset or a liability, the group takes into account the characteristics of the asset or liability if market participants would take those characteristics into account when pricing the asset or liability at the measurement date.

In addition, for financial reporting purposes, fair value measurements are categorised into level 1, 2 or 3 based on the degree to which the inputs to the fair value measurements are observable. The three levels are explained as follow:

Level 1 — inputs are quoted prices in active markets for identical assets or liabilities that the company can access at the measurement date. These quoted prices are unadjusted.
Level 2 — these are inputs, other than quoted prices included in level 1, that are observable for the asset or liability, either directly or indirectly.
Level 3 — inputs are unobservable inputs for the asset or liability.

There are inter-relationships between unobservable inputs. Expected vacancy rates may impact the yield, with higher vacancy rates resulting in higher yields. An increase in future rental income may be linked with higher costs. If the remaining lease term increases, the yield may decrease.