Independent auditor's report to the shareholders of Hyprop Investments Limited

for the year ended 30 June 2017

Report on the audit of the consolidated financial statements

Opinion

We have audited the consolidated financial statements of Hyprop Investments Limited (the group) set out here, which comprise the statement of financial position at 30 June 2017, and the statement of profit or loss and other comprehensive income, statement of changes in equity and statement of cash flows for the year then ended, and notes to the consolidated financial statements, including a summary of significant accounting policies.

In our opinion, the consolidated financial statements present fairly, in all material respects, the consolidated financial position of Hyprop Investments Limited at 30 June 2017, and its consolidated financial performance and consolidated cash flows for the year then ended in accordance with International Financial Reporting Standards and the requirements of the Companies Act of South Africa.

Basis for opinion

We conducted our audit in accordance with International Standards on Auditing (ISA). Our responsibilities under those standards are further described in the auditor's responsibilities for the audit of the consolidated financial statements section of our report.

We are independent of the group in accordance with the Independent Regulatory Board for Auditors Code of Professional Conduct for Registered Auditors (IRBA Code) and other independence requirements applicable to performing audits of consolidated financial statements in South Africa.

We have fulfilled our other ethical responsibilities in accordance with the IRBA Code and in accordance with other ethical requirements applicable to performing audits in South Africa. The IRBA Code is consistent with the International Ethics Standards Board for Accountants Code of Ethics for Professional Accountants (Parts A and B). We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our opinion.

Key audit matters

Key audit matters are those matters that, in our professional judgement, were of most significance in our audit of the consolidated financial statements of the current period. These matters were addressed in the context of our audit of the consolidated financial statements as a whole, and in forming our opinion thereon, and we do not provide a separate opinion on these matters.

Valuation of investment property

Refer to the accounting policies in note 1.10, the key estimations and uncertainties in note 1.24 and note 2 to the consolidated financial statements.

Key audit matter   How this matter was addressed in our audit

The group's most significant asset is its investment property portfolio. Investment property is measured at fair value, with changes in fair value recognised in profit or loss for the year.

The valuation of the group's investment properties involves significant judgements made by management using the advice of external valuers, particularly those around the selection of valuation models, current market conditions and rental levels.

The valuation exercise also relies on the completeness and accuracy of the underlying lease and financial information provided to the valuers by management.

Due to the magnitude of the investment property portfolio held and the significance of the judgements made in measuring the investment property at fair value, this matter was consider to be a key audit matter.

 
Our response to the key audit matter included the following audit procedures, among others:
  • We assessed the competence, objectivity and integrity of the external valuers. This assessment included but was not limited to assessing their professional qualifications, experience and independence from the group
  • Through discussions with the external valuers, we obtained an understanding of:
    • The valuation process adopted
    • The significant assumptions used and critical judgement areas in the valuation process, including uncontracted revenue, vacancy profiles and capitalisation rates.

Based on this understanding, we evaluated the work of the external valuers by performing the following:

  • For certain properties where there was a significant change in value from the prior year, challenging the assumptions used by the valuer and assessing whether the assumptions were in line with industry assumptions and market indicators
  • For a sample of properties, performing procedures to corroborate the information provided to the valuers by management. These procedures included but were not limited to the following:
    • Agreeing the forecast cash flows to the contracted revenue in the underlying leases
    • Agreeing growth rates in the models to the escalation rates in underlying leases
  • We considered the adequacy and completeness of the disclosures associated with investment property valuation.

Classification and valuation of investment in Hystead Limited (Hystead)

Refer to the accounting policies in notes 1.8, 1.12.5 and 1.12.8, the key estimations and uncertainties in note 1.24, and to note 6.3 and 7 to the consolidated financial statements.

Key audit matter   How this matter was addressed in our audit
The group continues to grow its portfolio of investment properties in South-Eastern Europe, held through Hystead, a joint venture, and funded in Euro with credit enhancement provided mainly by Hyprop (referred to as the Hystead structure). During the year, there were changes to the Hystead structure, including the acquisition of Balfin MK and changes in the underlying funding structure that resulted in recognition of revised financial guarantees at fair value and a corresponding charge to profit and loss.

The Hystead structure and the rights and obligations in the contracts underlying that structure are complex. The correct classification of the group's investment in Hystead as either an equity-accounted investment or a financial asset, and recognition of the credit enhancement guarantee as a financial guarantee, involves significant judgements made by management. Due to the changes in the structure, management re-evaluated whether the accounting treatment was still appropriate in the current year.

The valuation of the right to receive dividends and deferral of that right, as well as the valuation of the financial guarantees, relies on the selection of the appropriate valuation models and management judgements about the inputs to those models.

Due to the complexity of the Hystead structure and the significance of the judgements made in the continued applicability of the accounting policy selection and the related valuations, this matter was considered to be a key audit matter.

 

Our response to the key audit matter included the following audit procedures, among others:

  • Through inspection of the shareholders' agreement, funding agreements and other documents, as well as discussion with management, we gained an understanding of the transactions entered into in the current year
  • We challenged management, with assistance from our technical accounting specialists, on the continued application of selected accounting policies in accordance with International Financial Reporting Standards, including classification of the investment as a financial asset, recognition of the right to receive dividends from that financial asset, recognition of the financial guarantees, deferral of unrealised gains and disclosure of the encumbered investment properties supporting the credit enhancement provided
  • We challenged management's selection of the valuation model for the right to receive dividends and the financial guarantee, and the significant assumptions and judgements used in the valuation process, with assistance from our valuation specialists and their knowledge of the industry
  • For a selection of key inputs to the valuation models, we compared the inputs used by management to available internal and external sources
  • We assessed the adequacy of the disclosures about judgements made by management in accounting for and valuing the investment in Hystead and the financial guarantee.

Other information

The directors are responsible for the other information. The other information comprises the directors' report, the report of the audit committee and the declaration by the company secretary as required by the Companies Act of South Africa, and the approval of the consolidated financial statements, which we obtained prior to the date of this report, and the integrated annual report, which is expected to be made available to us after this date. The other information does not include the consolidated financial statements and our auditor's report thereon.

Our opinion on the consolidated financial statements does not cover the other information and we do not express an audit opinion or any form of assurance conclusion thereon.

In connection with our audit of the consolidated financial statements, our responsibility is to read the other information and, in doing so, consider whether the other information is materially inconsistent with the consolidated financial statements or our knowledge obtained in the audit, or otherwise appears to be materially misstated. If, based on the work we have performed on the other information obtained prior to the date of this auditor's report, we conclude that there is a material misstatement of this other information, we are required to report that fact. We have nothing to report in this regard.

Responsibilities of the directors for the consolidated financial statements

The directors are responsible for the preparation and fair presentation of the consolidated financial statements in accordance with International Financial Reporting Standards and the requirements of the Companies Act of South Africa, and for such internal control as the directors determine is necessary to enable the preparation of consolidated financial statements that are free from material misstatement, whether due to fraud or error.

In preparing the consolidated financial statements, the directors are responsible for assessing the group's ability to continue as a going concern, disclosing, as applicable, matters related to going concern and using the going concern basis of accounting unless the directors either intend to liquidate the group or to cease operations, or have no realistic alternative but to do so.

Auditor's responsibilities for the audit of the consolidated financial statements

Our objectives are to obtain reasonable assurance about whether the consolidated financial statements as a whole are free from material misstatement, whether due to fraud or error, and to issue an auditor's report that includes our opinion. Reasonable assurance is a high level of assurance, but is not a guarantee that an audit conducted in accordance with ISA will always detect a material misstatement when it exists. Misstatements can arise from fraud or error and are considered material if, individually or in the aggregate, they could reasonably be expected to influence the economic decisions of users taken on the basis of these consolidated financial statements.

As part of an audit in accordance with ISA, we exercise professional judgement and maintain professional scepticism throughout the audit. We also:

  • Identify and assess the risks of material misstatement of the consolidated financial statements, whether due to fraud or error, design and perform audit procedures responsive to those risks, and obtain audit evidence that is sufficient and appropriate to provide a basis for our opinion. The risk of not detecting a material misstatement resulting from fraud is higher than for one resulting from error, as fraud may involve collusion, forgery, intentional omissions, misrepresentations, or the override of internal control
  • Obtain an understanding of internal control relevant to the audit in order to design audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the group's internal control
  • Evaluate the appropriateness of accounting policies used and the reasonableness of accounting estimates and related disclosures made by the directors
  • Conclude on the appropriateness of the directors' use of the going concern basis of accounting and, based on the audit evidence obtained, whether a material uncertainty exists related to events or conditions that may cast significant doubt on the group's ability to continue as a going concern. If we conclude that a material uncertainty exists, we are required to draw attention in our auditor's report to the related disclosures in the consolidated financial statements or, if such disclosures are inadequate, to modify our opinion. Our conclusions are based on the audit evidence obtained up to the date of our auditor's report. However, future events or conditions may cause the group to cease to continue as a going concern
  • Evaluate the overall presentation, structure and content of the consolidated financial statements, including the disclosures, and whether the consolidated financial statements represent the underlying transactions and events in a manner that achieves fair presentation
  • Obtain sufficient appropriate audit evidence regarding the financial information of the entities or business activities within the group to express an opinion on the consolidated financial statements. We are responsible for the direction, supervision and performance of the group audit. We remain solely responsible for our audit opinion.

We communicate with the directors regarding, among other matters, the planned scope and timing of the audit and significant audit findings, including any significant deficiencies in internal control that we identify during our audit.

We also provide the directors with a statement that we have complied with relevant ethical requirements regarding independence, and communicate with them all relationships and other matters that may reasonably be thought to bear on our independence and, where applicable, related safeguards.

From the matters communicated with the directors, we determine those matters that were of most significance in the audit of the consolidated financial statements of the current period and are therefore the key audit matters. We describe these matters in our auditor's report unless law or regulation precludes public disclosure about the matter or when, in extremely rare circumstances, we determine that a matter should not be communicated in our report because the adverse consequences of doing so would reasonably be expected to outweigh the public interest benefits of such communication.

Report on other legal and regulatory requirements

In terms of the IRBA Rule published in Government Gazette Number 39475 dated 4 December 2015, we report that KPMG Inc. has been the auditors of Hyprop Investment Limited for two years.

KPMG Inc.
Registered Auditor
Per Peter Macdonald
Chartered Accountant (SA)
Registered Auditor
Directo
r

31 August 2017

KPMG Crescent
85 Empire Road
Parktown

2193