Risks and opportunity management

Hyprop views risk management as a core competency and is committed to effective risk management processes within industry practice. Hyprop has a structured and disciplined approach to group-wide risk management while maintaining a balance between risks and realising the opportunities associated with these risks.

The board of directors is ultimately responsible for risk management. Management assists the board by implementing a process to identify, assess, measure, monitor and report risks to the board via the audit and risk committee.

The audit and risk committee is supported by management reporting on various risks as well as reports from the independent internal audit service provider, PricewaterhouseCoopers.

Executive management implements controls to ensure the validity, accuracy and completeness of financial information. These controls are reviewed by the internal audit function and external audit. External audit reports on the fair presentation of the financial information at a statutory reporting level.

The risk management process is primarily designed to:

  • Avoid, or reduce threats to strategic objectives to an acceptable level, and exploit beneficial opportunities to add sustainable value to Hyprop's activities
  • Provide timely risk information and appropriate risk responses to assist in achieving strategic objectives
  • Reduce operational performance uncertainty by minimising surprises and associated costs and losses
  • Be owned and championed at all levels in the group
  • Monitor and provide reporting on industry risk trends and ensure appropriate board, audit and risk committee and executive committee reporting
  • Form an integral part of normal operations, processes and activities, and engender a culture of risk awareness.

Key principles

Hyprop's approach to risk management is based on several key principles:

  • A practical and consistent risk process across the organisation
  • Promoting and embracing a culture that recognises the importance of risk management by entrenching it in day-to-day processes, activities and decision-making
  • Ensuring that risk identification, assessment and management are part of normal business activities
  • Ensuring that the risk management process is aligned with Hyprop's values and strategic initiatives
  • Clearly defining roles and responsibilities within the context of the risk management process
  • Establishing and maintaining appropriate risk tolerances and focusing on risks that exceed defined thresholds
  • Relevant and effective risk reporting.

Risk tolerance

A risk tolerance statement specifies how much risk an organisation is willing to accept in the pursuit of its business objectives. Hyprop's risk tolerance is expressed through approval by the board of:

  • An annual budget which sets out targets for financial performance and provides guidance on reporting on unfavourable variances
  • A board charter which sets out the powers which have been reserved by the board, as well as a delegation of authority document which defines the authorities being delegated to management
  • Key performance deliverables (KPDs) indicating targeted outcomes (refer to the remuneration report). The risk culture is enhanced through the integration of the risk tolerances into an effective performance management framework
  • A collection of statements which define the extent to which Hyprop is unwilling to tolerate an event (including any instance of material non-compliance with approved policies and procedures) which, if it occurred, could cause any one, or more, of the following:
    • The inability to meet any of its core service obligations within prescribed timeframes
    • The inability to meet any one, or more, of its financial obligations
    • Reputational loss to the company such that its ability to operate effectively is seriously affected
    • The death, or serious injury, of a customer or an employee while on duty
    • The inability to generate sufficient profit to sustain its current and future operations.

Relationship between internal audit and risk management

The internal audit function derives its responsibilities from the audit and risk committee, to which it reports at least quarterly.

The responsibilities include:

  • Submitting an annual internal audit plan that indicates the extent and frequency of the work to be conducted
  • Reporting the results of reviews with opinions and recommendations for future improvements
  • Reporting on the progress against the internal audit plan and report back on any outstanding internal audit matters
  • Coordinating the audit efforts with those of the external auditors.

Risk categories

Risk categories are identified by management (the executive committee) and presented to the audit and risk committee. The audit and risk committee reviews the categories and makes adjustments as appropriate.

Risks are classified into the following three categories:

Internal risk: under the control of management,

External risk with control: can be mitigated by management, and

External risk without control: outside the control of management.

      Strategic objective       Key risk     Probable effect     Opportunity     Strategic response/mitigation
    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 footcount 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
          Slowing consumer spend affects retailers' trading densities and rent-to-sales ratios     Leases not renewed         Contractual lease income with financially sound tenants (most are reputable national companies with strong balance sheets and proven business models)
            Discounted rentals to retain tenants        
            Tenants more cautious on renewals and new lettings         Geographic diversification (e.g. sub-Saharan Africa and South-Eastern Europe)
            Tenants taking less space, increase in vacancies, 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
                    Introduced unsecured debt via debt capital market funding (DCM) and raising of new equity
    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
            Exchange rate fluctuations        
            National credit rating affected        
    Focus on sustainable income growth       Increased supply of retail space in the market     Discounted rentals to retain tenants     The quality and location of our shopping centres is one of our competitive advantages; despite this, Hyprop invests time and money into growing the Hyprop brand, as well as each individual shopping centre brand as a means to differentiate the group and its assets in an increasingly competitive marketplace     Meet tenant demand through extensions and tenant relocations
            Tenants become more demanding on leasing terms        
            Increased vacancies         Positioning Hyprop centres as defensive assets. Capital investments to retain quality and attractiveness to customers. Tenant incentives to retain key tenants
            Leases not renewed        
            Lower rental growth        
          Significant volume of leases expiring in any one year     Increase in vacancies         Stagger major lease expiries
          Restrictive clauses in leases     Limitation on tenant selection         Proactively manage lease expiries
                    Ensure a strong pipeline of prospective tenants
                    Not entering into new leases with restrictive clauses
    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 that align with the company‚Äôs strategy
          Negative impact of new codes            
          Transformation required in ownership            
    Reliable supply of water services       Negative impact of disrupted water supply at 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
    More efficient and effective utility cost management       Increased cost of occupancy from rates, taxes and utilities     Cost and supply of electricity and water     Seek sustainable technology options to limit our reliance on local utility suppliers, thereby mitigating the risk of utility supply failure     Numerous projects under way to reduce consumption
            Excessive increases in cost of occupancy impacting recoveries and renewals         Tenants guided by tenant criteria document, with guidelines on reducing electricity consumption
                    Introducing smart metering as well as objections to high increases in municipal rates
    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 shopping centres     Improve quality of service provider and continually invest in new security equipment
                   
            Negative impact on footcount         Better engagement between shopping centre employees, service provider, community and local police
            Reputational damage for Hyprop and its shopping centres        
    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     Matching debt with income (EUR)
            Reduced distributable income        
            Weakening currencies place country tenants under pressure         Consider hedging exposure in terms of material dividends received
            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
                    Strong lease agreements with financially sound tenants (most are reputable national companies with strong balance sheets and proven business models)
          Operating environment     Operating cost increases (specifically municipal rates and taxes)         Employ local, on-site executive and management teams
            Cost of development increases        
          Investment risk     Investment returns below expectations         Implement optimal holding structures
          Tax risk     Changes to tax laws in countries where Hyprop invests        
    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)
            Reduced distributable income        
            Weakening currencies place country tenants under pressure         Consider hedging exposure in terms of material dividends received
            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
                    Strong lease agreements with financially sound tenants (most are reputable national companies with strong balance sheets and proven business models)
          Operating environment     Operating cost increases (specifically municipal rates and taxes)         Employ local, on-site management teams
            Cost of development increases         Implement optimal holding structures
          Investment risk     Returns below expectations         Reduce the size of the investment through disposals
            Default on shareholder funding        
          Development risk     Lower return or inability to achieve target return         Not undertaking any new developments