Chairman and CEO's review
We ensure that our business model is sustainable and relevant to the economies in which we operate.
Hyprop is exposed to a number of economies that performed very differently during the year under review. South Africa continues to produce low levels of growth and there are no apparent catalysts to change that. The African economies to which we are exposed, other than South Africa, evidenced some level of improvement over the period, albeit off low bases. The greater European economy improved over the period and, at the time of writing, has a more positive outlook than has been the case for a considerable period.
The South African portfolio performed solidly during the period despite difficult economic conditions. While our properties displayed pleasing resilience, we were affected by weak consumer spend and the much reported closure of three Stuttafords stores. A large portion of the resultant vacancy had been anticipated based on prior discussions with the tenant, and the majority of the space has been filled. We again invested in our assets with particular focus on the Rosebank Mall, The Glen, Canal Walk and Clearwater Mall, and will continue to do so to ensure that our malls remain destinations of choice for shoppers.
In the absence of fundamental changes to the South African economy consumers and retailers will face a difficult future and that will impact the growth available from the South African portfolio.
We made significant progress on the disposal of non-core assets and anticipate the final disposals in the 2018 financial year.
The African portfolio produced differing results. Accra Mall, Ikeja City Mall and Manda Hill performed soundly at an operational level, even after the impact of some tenant rotation and vacancies, although their results were affected by the macro-economic conditions in the countries in which they are located. The improvement in commodity prices in recent months has had a positive impact on the countries concerned with significant improvements in access to hard currency in Nigeria, continued progress in the Ghanaian economy and pleasing levels of economic growth in Zambia. The properties will benefit from any continuation of these trends.
The West Hills, Achimota and Kumasi malls produced muted performances. Although the tenant mixes are improving and vacancies are reducing, the malls will require time to stabilise and produce the expected returns.
A number of the African properties are being refinanced and that process should be completed early in the new financial year.
We continued our expansion into South-Eastern Europe by acquiring a 60% effective stake in Skopje City Mall in Macedonia, and subsequent to the year-end, a 60% effective stake in The Mall, Sofia.
We are now invested in Serbia, Montenegro, Macedonia and Bulgaria. While Bulgaria is the only one of those countries that is a member of the European Union, the economic fundamentals in the other countries are sound and compare favourably to what we face domestically.
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.
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.
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 299m2), cinemas at Woodlands Boulevard (2 397m2) and the former HiFi Corporation store at CapeGate (1 358m2).
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 942m2 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.
|Ex Stuttafords premises vacancy|
|Vacant at 1 June 2017||11 082|
|Canal Walk (H&M)||(4 628)|
|Rosebank (various)||(2 802)|
|Clearwater (Mr Price & other)||(2 003)|
|Balance (Clearwater Mall)||1 649|
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.
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.
|% of total
|Con- tractual escalation (%)|| No. of
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.
Extensions and refurbishments at Rosebank Mall, The Glen and Canal Walk are on schedule and within budget:
|Rosebank Mall||Additional 4 300m2 rentable area||R127,0 million||April 2018|
|The Glen||Food court enclosure and additional 1 200m2 rentable area||R90,9 million||April 2018|
|Canal Walk||Additional retail in La Piazza area||R41,6 million||November 2017|
The extension to the Rosebank Mall will accommodate H&M and a number of other tenants, while refurbishments at Canal Walk and The Glen will strengthen the retail offering in specific areas. The estimated average forward yield for the three projects is 7%.
In line with our focus on improving the quality and sustainability of our shopping centres, R178 million (2016: R178 million) was spent on refurbishments, tenant installations, new equipment and technology. The third phase of the solar photovoltaic plant at Clearwater Mall was completed in September 2017, after which approximately 15% of Clearwater Mall's electricity requirements will be met by solar power.
We disposed of four non-core assets for a total of R867 million, at an average yield of approximately 9%. The disposal of non-core assets has improved the overall quality of the portfolio, with a reduced exposure to the higher risk office sector. We anticipate selling the remaining non-core asset, Lakefield Office Park, during the 2018 financial year.
Crime in South Africa is at disturbing levels and customer security in our shopping centres is a priority. We have increased the physical security presence in the shopping centres, where appropriate, and have invested in relevant technology, including facial and licence plate-recognition software, with pleasing results.
Sub-Saharan Africa (excluding SA)
Improved macro-economic conditions are starting to benefit our African operations with an improvement in rental collections, although there is no significant growth in rental levels.
Distributable earnings from the investments in sub-Saharan Africa (excluding SA) reduced to R57,0 million (30 June 2016: R83,7 million), largely due to the exclusion of distributable earnings from Ikeja City Mall, replacement of tenants at lower rentals in Manda Hill Centre and Rand appreciation against the US Dollar.
In light of the improved US Dollar liquidity in Nigeria, we expect to resume distributions from Ikeja City Mall during the 2018 financial year. During the current year R65 million (Hyprop share: R48,7 million) was applied to the reduction of senior in-country US Dollar debt in Nigeria.
The core malls, Ikeja, Manda Hill and Accra Mall, are performing solidly and while there has been some level of tenant rotation and resetting of rentals, they are high quality properties and the outlook for them is positive. The malls that have been developed, West Hills Mall, Achimota Retail Centre and Kumasi City Mall, are stabilising and vacancy levels are reducing. Considerable effort has been devoted to ensuring that the anchors and tenant mixes in these properties are appropriate to the shoppers to whom we are appealing, many of whom are not accustomed to shopping malls.
Hyprop's investments in South-Eastern Europe are held through a UK company, Hystead Limited, in which Hyprop has a 60% interest. The purchase of Skopje City Mall in Macedonia for a consideration of EUR92 million was effective in October 2016.
Trading conditions at the European shopping centres were pleasing and the operational metrics, including footcount and turnover growth, were strong and improved over the period. There is significant demand for space in the centres and progress is being made on plans to extend the centres. There were no vacancies in the shopping centres at year-end (30 June 2016: 0%).
The South-Eastern European portfolio contributed R101,8 million to group distributable earnings in the current period (2016: R24,6 million).
In July 2017, Hystead reached agreement to acquire The Mall shopping centre in Sofia, Bulgaria, for EUR155 million, with completion expected in October 2017. The Mall is the dominant shopping centre in Sofia and has a rentable area of 52 000m², with a weighted average rent of EUR18,30/m² per month. This will be Hystead's fourth South-Eastern European acquisition, and the first in a European Union country, taking the portfolio to a gross asset value of approximately EUR460 million.
A separate listing of Hystead in the first half of 2018 is currently under consideration. A listing would enable Hystead to provide shareholders with a focused South-Eastern European shopping centre fund and enable the capital to be raised that will be required for the planned growth of the fund.
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 sensible manner. As such, we ensure that our business model is sustainable and relevant to the economies in which we operate.
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 tight accountability for outcomes.
Transformation is a priority for sustainable South African businesses. Hyprop continues to improve in this area and, while our broad-based black economic empowerment rating has been affected by the new codes and their impact on the property charter, we continue to implement initiatives that benefit our people, our business and the environments in which we operate.
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 provided in this integrated annual report.
Ethan Dube resigned as a non-executive director on 1 December 2016. On behalf of the board, we thank him for his contribution and wish him well in his future endeavours.
Nonyameko Mandindi joined the Hyprop board on 8 May 2017. We welcome her and look forward to a productive relationship.
Hyprop, based on JSE criteria, has a 100% free float. Foreign shareholders owned 25,0% of the company at 30 June 2017, a slight decrease from 26,3% at 30 June 2016. Trading volumes slowed to 52,1% from 71,8% in 2016.
Top 10 beneficial shareholders
|Rank||Beneficial shareholder||% of issued
|1||Government Employees Pension Fund||14,5|
|5||Prudential Investment Managers||3,3|
|6||Eskom Pension & Provident Fund||3,0|
|7||MMI Holdings Ltd||2,9|
South Africa's economic growth rate has been at very low levels for a number of years. This has resulted in increasing pressure on the consumer as unemployment grows, wage and salary increases fail to keep pace with administered inflation and access to finance becomes more difficult. Ongoing policy uncertainty and frequent economic mismanagement by government are a deterrent to the investment required to grow the economy and the perpetual failure to address the chronic deficiencies in our education system mean that many of our people are ill equipped to survive in a modern economy.
In the absence of fundamental changes to the way South Africa is governed, and catalysts for those changes are not obvious, economic growth is likely to remain low and the majority of South Africans will get poorer over time.
The shopping centres in our South African portfolio have proved to be resilient in difficult economic conditions. We will continue to invest in the properties to ensure that they remain attractive to shoppers and will continue to optimise the yields from the centres through careful management of revenue, costs and tenant covenants. Our ability to generate strong growth from the portfolio will, however, be constrained by the weak economic environment in which we operate.
Ghana, Nigeria and Zambia all benefited from the recent rise in commodity prices and while there are still fundamental issues in each of the economies, the outlook for all of the countries is more favourable than it was a year ago.
We expect to be able to distribute the earnings from Ikeja City Mall in the 2018 financial year which will bolster the absolute distribution from the portfolio. Considerable attention will be focused on the properties that have been developed in order to reduce vacancies, improve the key operating metrics, and in due course, manage rental levels upwards.
After a number of years of careful management and significant levels of quantitative easing, the greater European economy is looking increasingly healthy and is producing encouraging growth. While only one of our South-Eastern European properties is in a European Union country, the economies in the remaining countries demonstrate similar levels of growth and will be positively affected by the greater European recovery.
Rental growth in low inflation economies is lower than what we are accustomed to domestically and, in addition to careful tenant management, we will invest in the properties we have acquired in order to enhance growth levels.
We are contemplating a separate listing of Hystead in the first half of 2018 and should that occur, Hyprop's shareholding in the company is likely to decline to below 50%. We are working on refinancing the portfolio which will have the effect of reducing or eliminating the Hyprop guarantee, once implemented this will also reduce or eliminate the guarantee fee.
We will make further acquisitions in South Africa and South-Eastern Europe where properties become available that meet our investment criteria and the related returns justify the price. The South Africa market is restricted with very limited availability of high quality properties and pricing often being an issue when properties do become available. We are investigating a number of opportunities in South-Eastern Europe and believe that there is a greater likelihood of acquisitions in those geographies, than domestically, in the next year.
We forecast growth in distributions of between 7% and 9% for the year to 30 June 2018. This forecast, which has not been reviewed by Hyprop's auditors, is based on the following key assumptions:
- Forecast investment property income is based on contractual rental escalations and market-related renewals
- Appropriate allowances for vacancies have been incorporated
- No major corporate or tenant failures
- Earnings from offshore investments will not be materially impacted by exchange rate volatility. Exchange rates have been assumed at R13,00 and R15,00 to the US Dollar and Euro, respectively
- Loss of income due to developments in the South African portfolio of R9,3 million
- The Hystead listing taking place in the first half of calendar year 2018.
On behalf of the board we thank our executives, management and staff for their considerable efforts during the year. We also thank our stakeholders for their support and our fellow board members for their guidance and support.
1 September 2017
Chief executive officer