Risk and opportunity management

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

Approach

Hyprop’s system of internal controls is designed to provide reasonable assurance as to the integrity and reliability of the financial statements, and are intended to safeguard, verify and maintain accountability of the company’s assets. They are also 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 committee. This committee is assisted by management reporting and periodic reviews, as well as reports from an independent internal audit service provider. The committee reports 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 a statutory reporting level.

Risk and opportunity matrix 2017

(High-risk category only)

      Strategic
objective
  Key risk   Probable effects   Opportunity   Strategic response/mitigation   Key performance
deliverable
 
    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   Continually improve the quality of our portfolio through acquisitions, developments and disposals. This focus ensures that we attract and retain quality tenants, while maintaining/increasing shopper footfall in our shopping centres. The depressed economy may also facilitate local acquisition opportunities   Hyprop shopping centres 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     Contractual lease income with financially sound tenants (most are reputable national companies with strong balance sheets and proven business models)   Arrears, trading densities, rent affordability  
  Discounted rentals to retain tenants     Geographic diversification (eg sub-Saharan Africa and South-Eastern Europe)  
  Tenants more cautious on renewals and new lettings        
  Tenants taking less space, slower extension plans        
  Downgraded sovereign
credit rating
  Increased borrowing costs   The quality of our assets, scale of our organisation, and international diversification strategy will assist in mitigating the effects of a downgrade   High ratio of fixed interest rate debt   Distribution growth  
                    Introduced unsecured debt via debt capital market funding (DCM)      
                           
    Transformation
and
business
opportunities
  BBBEE level   Major tenants prefer landlord to have a reasonable BBBEE rating   Embrace transformation   Strategic imperative. Plan in place to achieve incremental and sustainable improvements   Independent BBBEE rating  
  Negative impact of new
codes
                 
  Transformation required in ownership                  
                             
    Reliable
supply of
water services
  Negative impact of
disrupted water supply at Hyprop shopping centres
  Prolonged water outages mean sub-optimal trading conditions   Seek sustainable technology options to limit our reliance on local utility suppliers   Implement alternative water supply and water savings initiatives   Cost of occupancy –
water consumption
 
Read more on page 65
                           
  Secure
environment
for our
shoppers
  Increased crime at
shopping centres
  Hyprop forced to spend more on security equipment   Enhanced security measures can differentiate our properties and improve stakeholder experience and time spent at our malls   Improve quality of service provider and security equipment   Improved crime statistics at shopping malls  
      Crime at shopping malls       Better engagement between shopping centre employees, service provider, community and local police      
      Negative impact on footfall              
      Reputational damage for Hyprop and its malls              
                             
    Increase
portfolio and
geographic
diversification
  Currency exchange rate risk   Unable to repatriate funds due to illiquid currency markets or capital restrictions   Continually look for geographical diversification opportunities to improve the quality of our portfolio, guided by stringent investment criteria   Matching debt with income (USD)   Size of dividend (current percentage of income)  
  Reduced distributable income       Consider hedging exposure in terms of material dividends received  
  Weakening currencies place country tenants under pressure          
  Excessive volatility in exchange rates          
  Slowdown in consumer spend   Leases not renewed       Hyprop shopping centres are well established, in dominant locations and attract flagship stores   Arrears, trading densities rent affordability  
  Operating environment   Operating cost increases (specifically municipal rates and taxes)       Strong lease agreements with financially sound tenants (most are reputable national companies with strong balance sheets rent affordability and proven business models)    
      Cost of development increases       Employ local, on-site management teams   Ability to deliver development projects on time and within budget  
  Investment risk   Returns below expectations       Implement optimal holding structures   Ability to conduct day to-day operational activity  
  Default on shareholder funding       Investment still a small percentage of Hyprop’s total portfolio   USD yields  
  Development risk   Lower return or inability to achieve target return       Reduce size of investment/elect not to invest at all   Initial yield on opening  
              Conduct studies to ensure adequate pre-let requirements are met before development    
                             
    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   Low economic growth in South Africa, coupled with SA political uncertainty has prompted Hyprop to diversify its geographic footprint into South-Eastern
Europe
  Hedge risks relating to exchange rates and interest rates   Share price performance  
  Exchange rate fluctuations   Arrears, trading densities, rent affordability  
  National credit rating affected   Distribution growth  
                             

 

  Internal risks (under control of management)
  External risks (can be mitigated by management)
  External risks (outside control of management)