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Hyprop Investments Limited

Integrated annual report and consolidated financial statements

2017

15

The properties we owned during the year performed strongly and

exceeded our expectations at the dates we acquired them. As with

the developed world, Serbia, Montenegro, Macedonia and Bulgaria are

low inflation economies and we will invest in the properties to enhance

the returns they provide.

International Financial Reporting Standards require that the properties and

related financing are accounted for in a manner that results in a financial

asset, the recognition of which is deferred, and a financial liability, that

is recognised on balance sheet. This unfortunately does not reflect the

substance of our effective ownership of 60% of each of the properties

and our liability for the debt funding of the properties. Hyprop has

guaranteed 100% of the debt on the properties, holds security for the

debt not attributable to the 60% share of the properties it effectively

owns, and earns a fee for the provision of the guarantee.

Hyprop owns 60% of Hystead, a holding company which owns the

South-Eastern European properties. Our intention is to grow the Hystead

portfolio and we are contemplating further investments in the relevant

geographies. We are also considering a separate listing of Hystead to

provide shareholders with a standalone South-Eastern European

focused portfolio.

Financial performance

Hyprop declared a dividend of 347,8 cents per share for the six months

ended 30 June 2017, an increase of 8,0% on the corresponding period

in 2016. The total distribution for the year of 695,1 cents per share is

an increase of 12,1% on the prior year, in line with our forecast.

Due to constraints on the conversion of Naira to US Dollar, distributable

earnings of R26 million from Ikeja City Mall were excluded from dividends

for the year.

Distributable earnings benefited from the inclusion of R101,8 million

of income from the investments in South-Eastern Europe (30 June 2016:

R24,6 million).

Clearwater Mall, Hyde Park Corner, CapeGate and Somerset Mall

performed well during the year, with weighted average growth in

distributable earnings of 8,6%. The Glen’s income was negatively affected

by construction work and limited rent reductions.

Trading density growth continued to slow in the second half of the

year. Excluding The Glen, trading density growth for the year was 2,0%

(30 June 2016: 6,7%). Trading density growth for the year including

The Glen was 1,4% (30 June 2016: 5,0%). The rent ratio at year-end

was 8,5% compared to 8,0% in the prior year.

Notwithstanding the lower trading density growth, Hyprop’s shopping

centres continue to receive strong demand for space from both national

and international tenants.

Vacancies

The retail vacancy of 1,9% includes the former Stuttafords stores at

Clearwater Mall and Rosebank Mall which were vacated at the end of

May 2017 (6 299m

2

), cinemas at Woodlands Boulevard (2 397m

2

) and the

former HiFi Corporation store at CapeGate (1 358m

2

).

The Stuttafords store at Canal Walk has been re-let to H&M (scheduled to

begin trading in November 2017) and taking other lettings into account,

the retail vacancy rate reduced to 1,7% subsequent to year-end.

The increase in office vacancies relates primarily to The Mall Offices in

Rosebank, where Sasol vacated 8 942m

2

during the year. Good progress

has been made in letting this space, albeit at lower rentals. Other office

vacancies include small areas at Hyde Park Corner and Canal Walk.

Vacancies

30 June

2017

30 June

2016

30 June

2015

Retail (%)

1,9

0,8

1,3

Offices (%)

7,9

4,5

8,3

Total (%)

2,4

1,1

2,0

Ex Stuttafords premises vacancy

Vacant at 1 June 2017

11 082

Let:

Canal Walk (H&M)

(4 628)

Rosebank (various)

(2 802)

Clearwater (Mr Price & other)

(2 003)

Balance (Clearwater Mall)

1 649

Valuations

Investment property was valued at R28,3 billion at 30 June 2017

(30 June 2016: R26,9 billion, excluding the properties sold), an increase

of 5,1%. The weighted average capitalisation rate of the portfolio is 6,6%.

All discount and capitalisation rates remained largely the same as those in

the previous year.

The increase in the value of the portfolio was in line with expectations

given current economic conditions and the pressure on retailers and

consumers.

Leasing

Contractual lease escalations dipped marginally to 7,9% from 8,1% in 2016.

Rental growth on new leases and renewals slowed to 6,1% from 7,3% in

2016, reflecting difficult economic conditions.

Leasing activity

% of total

portfolio

Rentable

area

(m²)

Rental

growth

(%)

Con-

tractual

escalation

(%)

No. of

leases

Retail

15,4 103 286

6,1

7,9

355

Offices

37,6 22 290

(9,7)

8,1

47

Total

17,2 125 576

4,0

7,9

402

We continue to improve our tenant mix by replacing weaker tenants with

stronger retailers.

We perform regular reviews of the financial health of our tenants and,

where appropriate, take actions in that regard. Despite the high quality

of the majority of our tenants we are conscious of the pressure on

retailers in the current environment and the resultant, elevated risk of

financial distress.