Risk management

The material risks identiﬁed by the group in terms of their probability and potential impact are shown below. Each risk has been mapped to the strategic objective it could impact, affected stakeholders, management’s strategic response and related key performance indicators, as below.

Approach

Hyprop’s system of internal control is designed to provide reasonable assurance as to the integrity and reliability of the ﬁnancial statements. By managing rather than eliminating risks, these systems are intended to safeguard, verify and maintain accountability of the company’s assets. Equally, they are designed to identify and minimise significant fraud, potential liability, loss and material misstatement, while complying with applicable laws and regulations.

Framework/process

The board reviews and monitors the effectiveness of internal control systems, assisted by the audit and risk committees. These committees in turn are assisted by management reporting and periodic reviews, as well as reports from an outsourced internal audit service provider. The committees report to the board on the findings of the internal audit function.

Executive management implements controls to ensure the validity, accuracy and completeness of financial information. These controls are reviewed by internal and external audit. External audit reports on the fair presentation of financial information at statutory reporting level. On an operational level, this is done by the executive committee.

Risk committee

This board committee has an independent oversight role, making recommendations to the board for its consideration and final approval. The committee does not assume the functions of management, which remain the responsibility of the executive directors and senior management. The main role of the committee is to adopt and oversee an appropriate risk management policy, aligned with industry practice. For further detail on the role and mandate of this committee, please refer to its charter online.

Strategic objective	Key risk	Probable effects	Severity of risk	Stakeholder	Strategic response/mitigation	Key performance indicator	Risk (up/no change/down)


Focus on sustainable income growth	Low GDP growth impacts business growth in South Africa	Slower retail sales growth affects retailers’ financial positions and ability to pay rent	High	Providers of capital (debt and equity investors and financial institutions)	Hyprop malls are well established, in dominant locations and attract flagship stores	Arrears, trading densities, rent affordability
	Slowing consumer spend affects retailers’ trading densities and rent ratios	Leases not renewed Discounted rentals to retain tenants Tenants more cautious on renewals and new lettings Tenants taking less space, slower extension plans	High	Tenants Providers of capital (debt and equity investors, financial institutions)	Contractual lease income with financially sound tenants (most are reputable national companies with strong balance sheets and proven business models) Geographic diversification (eg sub-Saharan and South-Eastern expansion)	Arrears, trading densities, rent affordability
	Downgraded sovereign credit rating	Increased borrowing costs	High	Providers of capital (debt and equity investors and financial institutions)	High ratio of fixed interest rate debt Introduction of unsecured debt in the form of debt capital market (DCM)funding	Distribution growth

Focus on sustainable income growth	Increased supply of retail space in the market	Discounted rentals to retain tenants Tenants become more demanding on leasing terms Increased vacancies Leases not renewed Lower rental growth	High	Tenants	Meet tenant demand through extensions and tenant relocations Demand for space in Hyprop centres continues to outstrip supply, resulting in a strong pipeline of prospective tenants	Leasing activity, rental growth, contractual escalations, workload (percentage of total leases expiring in one financial year)
	Significant volume of leases expiring in any one period	Increase in vacancies	Medium	Tenants	Stagger major lease expiries	96% of expired leases renewed on time
	Restrictive clauses in leases	Limitation on tenant selection	Medium	Tenants	Proactively manage lease expiries Ensure a strong pipeline of prospective tenants Not to enter into new leases with restrictive clauses	Monitoring of leases with restrictive clauses

Attracting and retaining the best people	BBBEE level	Major tenants prefer landlord to have reasonable BBBEE rating	High	Employees Suppliers Tenants	Identified as a strategic imperative. Plan in place to achieve incremental and sustainable improvements	Independent BEE rating
	Negative impact of new codes	Potential impact on corporate activity in SA
	Transformation required in ownership, directors and senior management	Potential for regulatory penalties

Providing the highest level of service to our tenants	Negative impact of disruptive electricity supply on the economy and at Hyprop malls	Unable to recover tenants’ portion of consumption means lower distributable income Lower rentals to retain certain tenants Prolonged power outages result in sub-optimal trading conditions	Medium	Mall customers Tenants	Numerous projects underway to reduce consumption 1 500kWp solar photovoltaic plant at Clearwater Mall	Cost of occupancy — electricity consumption
Providing the highest level of service to our tenants	Increase in capital cost to provide more generators	Increased electricity and diesel costs	Medium	Municipal authorities	Introducing smart metering Energy-saving initiatives	Cost of occupancy — electricity consumption

Providing the highest level of service to our tenants	Negative impact of disrupted water supply at Hyprop malls	Prolonged water outages result in sub-optimal trading conditions	Medium	Mall customers Tenants	Storage tanks capacity to increase	Cost of occupancy — water consumption

Providing the highest level of service to our tenants	Increased cost of occupancy from rates, taxes and utilities	Cost and supply of electricity and water Excessive increase in cost of occupancy impacting recoveries and renewals	Medium	Tenants	Numerous projects under way to reduce consumption Tenants guided by tenant criteria document, with guidelines on reducing electricity consumption Introducing smart metering	Cost of occupancy — water, rates and electricity consumption
Providing the highest level of service to our tenants	Deterioration of municipal administration and service delivery	Incorrect utility billings Delays in transfer of acquisitions and disposals Inadequate services provided Excessive lead times for town planning approval	High	Tenants Providers of capital (debt and equity investors, financial institutions)	Working closely with professional consultants to optimise local authority approval processes and minimise negative impact of billing errors	Town council approvals received, utilities recovered

Providing the highest level of service to our tenants	Increased levels of crime at shopping centres	Hyprop forced to spend more capital on security equipment Crime at shopping malls Negative impact on footfall Reputational damage for Hyprop and for its malls	Medium	Mall customers Tenants Community	Improve quality of service provider and security equipment Better engagement between shopping centre staff, service provider, community and local police	Improved crime statistics at shopping malls

Gearing	Deterioration of gearing profile	Inability to pursue investment opportunities	Medium	Providers of capital (debt and equity investors, financial institutions)	Maintain conservative gearing levels Ensure available funding to cover capital requirements Diversified sources of funding	Undrawn facilities and capacity under debt capital market programme, covenants
Managing exposure to interest rate fluctuations	Potential increase in interest rates	Increased borrowing costs result in reduced distributable income	Medium	Providers of capital (debt and equity investors and financial institutions)	Reduction in borrowing costs enhanced distributions 89,6% of SA debt fixed for 4,9 years, and 72,4% of USD debt fixed for 3,7 years Proactive management of interest-bearing borrowings	Maturity profile, cost of funding

Attracting and retaining the best people	Shortage of industry skills may result in an inability to recruit required executive staff and increase costs of retaining key staff	Departure of executive directors and key executives may place strategy execution at risk	Medium	Providers of capital (debt and equity investors and financial institutions) Tenants Suppliers Employees	Retention strategy includes performance incentives, remuneration benchmarking, personal development plans Share scheme implemented Succession plans reviewed biannually by nomination and remuneration committee	Strategy implementation Staff turnover
Attracting and retaining the best people	Succession planning		Medium			Strategy implementation Staff turnover

Increase portfolio and geographic diversification	Currency exchange rate risk	Unable to repatriate funds due to illiquid currency markets or capital restrictions Reduced distributable income Weakening currencies place country tenants under pressure Excessive volatility in exchange rates	High	Tenants Providers of capital (debt and equity investors, financial institutions)	Matching debt with income (USD) Consider hedging exposure in terms of material dividends received	Size of dividend (current percentage of income)
	Slowdown in consumer spend	Leases not renewed	High	Tenants Providers of capital (debt and equity investors, financial institutions)	Hyprop malls are well established, in dominant locations and attract flagship stores Strong lease agreements with financially sound tenants (most are reputable national companies with strong balance sheets and proven business models)	Arrears, trading densities, rent affordability
	Operating environment	Operating cost increases (specifically municipal rates and taxes) Cost of development increases	High	Providers of capital (debt and equity investors, financial institutions)	Employ local, on-site management teams Implement optimal holding structures	Ability to deliver development projects on time and within budget Ability to conduct day-to-day operational activity
	Investment risk	Returns below expectations Default on shareholder funding	High	Providers of capital (debt and equity investors, financial institutions)	Investment still a small percentage of Hyprop’s total portfolio	USD yields
	Development risk	Reduction in return or inability to achieve target return	High	Providers of capital (debt and equity investors, financial institutions)	Reduce size of investment/scale down investment in the face of risk/elect not to invest at all Conduct studies to ensure adequate pre-let requirements are met prior to developments	Initial yield on opening
	Tax risk	Changes to tax laws in countries where Hyprop invests	Medium	Providers of capital (debt and equity investors, financial institutions)	Consider alternative tax structures	Low tax rate

Increase portfolio and geographic diversification	Operating environment	Operating cost increases (specifically municipal rates and taxes) Cost of development increases	Medium	Providers of capital (debt and equity investors, financial institutions)	Employ local, on-site management teams Implement optimal holding structures	Ability to deliver development projects on time and within budget Ability to conduct day-to-day operational activity
Increase portfolio and geographic diversification	Tax risk	Changes to tax laws in countries where Hyprop invests	Medium	Providers of capital (debt and equity investors, financial institutions)	Consider alternative tax structures	Low tax rate

Minimise political risk due to policy changes	Governments adopt policies that are unfavourable to foreign investors, particularly movement of capital, taxation and land ownership	Share price fluctuations Exchange rate fluctuations National credit rating affected	High (SA)	Providers of capital (debt and equity investors, financial institutions)	Proactive risk management of debt profile by staggering fixed interest rate expiries	Share price performance Arrears, trading densities, rent affordability Distribution growth