2. Investment property
      Note  June 2017 
   June 2016 
2.1  Net carrying value                
   Historical cost     14 830 378     15 811 661    
   Accumulated fair value movements     14 713 281     13 599 786    
   Assets classified as held-for-sale  13  (415 182)    (1 224 090)   
         29 128 477     28 187 357    
2.2  Movement for the year               
   Investment property at valuation at 1 July     28 187 357     24 511 778   
   Capital expenditure     123 721     108 481   
   Acquired through business combination           2 138 690   
   Foreign currency translation difference     (270 183)    151 234    
   Change in fair value     1 181 786     1 382 134   
   Interest capitalised    22 872     2 031    
   Straight-line rental income accrual     (39 587)    (101 801)   
   Transfer to non-current assets held-for-sale     (55 489)    (5 190)   
   Investment property at valuation     29 128 477     28 187 357    
2.3 Reconciliation to independent valuation          
  Investment property at valuation at year-end   29 128 477   28 187 357  
  Straight-line rental income accrual   553 119   515 206  
  Building appurtenances and tenant installations   148 530   126 100  
  Centre management assets   (4 794)   (6 465)  
  Independent valuation(1)   29 825 333   28 822 198  
  Capitalisation rate used to determine interest capitalised   8,3%   7,7%  
(1) Excludes property held-for-sale

Included in investment property held-for-sale is property under leasehold in respect of Willowbridge North. The lessor is Transnet Limited and the lease term runs until 30 June 2033. Subsequent to year-end, Willowbridge North was sold for R225 million and is anticipated to transfer in September 2017.

2.4 Encumbered investment property

The following properties have been pledged as security by means of mortgage bonds (refer to note 17 – Borrowings):

To Standard Finance (Isle of Man) Limited and Standard Bank of South Africa Limited to secure borrowing facilities of USD280 million:

1. A 75,15% undivided share in The Glen

2. A 40% undivided share in Canal Walk.

To Old Mutual Specialised Finance Proprietary Limited to secure borrowing facilities of R400 million:

Somerset Mall

To Rand Merchant Bank (a division of FirstRand Bank Limited) to secure borrowing facilities totalling R200 million, USD23 million and EUR300 million:

1. A 40% undivided share in Canal Walk

2. Clearwater Mall.

To Nedbank Limited to secure borrowing facilities totalling R1,5 billion:

1. CapeGate

2. Atterbury Value Mart.

To Stanbic IBTC Bank PLC to secure borrowings totalling USD32,5 million:

Ikeja City Mall

To Investec Asset Management Proprietary Limited to secure borrowings totalling USD24,3 million:

Ikeja City Mall

Encumbered properties total R22,1 billion (2016: R24,4 billion).

2.5 Investment property valuation

Valuation process

It is the policy of the group to obtain an independent valuation of the South African investment property portfolio on a six-monthly basis. Investment properties held by subsidiaries or associates of AttAfrica and Hystead are valued by independent valuers on an annual basis. More than one independent valuer may be used to provide the valuations. Investment property is reflected at fair value at 30 June 2017.

The South African portfolio plus Ikeja City Mall in Lagos, Nigeria, was valued at R29,8 billion at 30 June 2017 (2016: R28,8 billion), excluding property held-for-sale. The portfolio was valued by three independent, professionally qualified property valuers:

Viking Valuations – led by Trevor King, managing director

The investment properties were valued by Mr Trevor King, BSc Hons (Building Science, UCT), Dip Surveying (UK, Reading University), Professional Registered Valuer (SA Council of Valuers), Chartered Valuation Surveyor (Royal Institute of Chartered Surveyors RICS). Mr King has over 32 years’ experience in the property valuation industry. The valuations were conducted in accordance with International Valuation Standards.

9 South African
(retail and
cash flow
Jones Lang LaSalle Proprietary Limited (JLL), led by Jürgen Karg

The valuations division of JLL led by Jürgen Karg (BSc MBA FRICS MIV(SA)), Professional Registered Valuer, member of the South African Council for the Property Valuers Profession, Chartered Valuation Surveyor and Associate of the Royal Institution of Chartered Surveyors (UK).

2 South African
(both retail)
cash flow
Jones Lang LaSalle Proprietary Limited (JLL), led by Joshua Askew FRICS CIS HypZert (MLV)

FRICS, Head of Valuation: Sub-Saharan Africa, National Director, RICS Regulated Valuer, Chartered Valuation Surveyor and Fellow of the Royal Institution of Chartered Surveyors. Licensed European Pfandbrief (Covered Bond) MLV Valuer.

1 Nigerian
cash flow

The valuers work independently of each other and their valuations are combined to arrive at a fair value for investment property.

The significant inputs and assumptions in respect of the valuation processes are developed in close consultation with management.

The valuation processes and fair value changes are reviewed by the audit committee and the board of directors at each reporting date. The directors confirm that there have been no material changes to the assumptions applied by the registered valuers.

The most significant inputs to the valuation process, all of which are unobservable, are the estimated rentals at the end of the lease, assumptions regarding vacancy levels, the discount rate and the reversionary capitalisation rate. The estimated fair value increases if the estimated rental increases, vacancy levels decline or if discount rates (market yields) and reversionary capitalisation rates decline.

The valuations are sensitive to all four assumptions. The inputs used in the valuations at 30 June 2017 were:

  • The range of initial capitalisation rates applied to the portfolio was between 6,3% and 8,5% with the weighted average being 6,7% (2016: 6,8%). The initial capitalisation rates approximate the average annualised property yields.
  • The discount rates applied ranged between 12,3% and 14,5% with the weighted average being 12,5% (2016: 11,7%)
  • The permanent vacancy factor applied for shopping centres ranged between 0,5% and 2,0% (offices 0,5% and 2,0%)
  • The average rental escalation percentage applied for shopping centres and offices was 6% and for renewals and new leases ranged between 6,5% and 8,0%.

Changes in discount rates attributable to changes in market conditions can have a significant impact on property valuations.

Effect on valuation of investment property portfolio:

  • A 25 basis point increase in the average discount rate will decrease the value of investment property portfolio by R634 million (2,0%)(2016: R674 million (2,1%))
  • A 25 basis point decrease in the average discount rate will increase the value of investment property portfolio by R660 million (2,0%) (2016: R703 million (2,2%))
  • A 25 basis point increase in the capitalisation rate will decrease the value of investment property portfolio by R1,17 billion (3,6%) (2016: R1,21 billion (3,7%))
  • A 25 basis point decrease in the capitalisation rate will increase the value of investment property portfolio by R1,26 billion (3,9%) (2016: R1,30 billion (4,0%))

Valuation techniques underlying management’s estimation of fair value

The valuations were determined using discounted cash flow projections, based on significant unobservable inputs. These inputs include:

Future rental cash flows: Based on the location, type and quality of the properties and supported by the terms of any existing leases or other contracts or external evidence such as current market rentals for similar properties.

Discount rates: The discount rate is the rate of return used in a discounted cash flow analysis to determine the present value of future cash flows, and takes into account an assessment of the uncertainty in the amount and timing of future cash flows.

Vacancy rates: Based on current and expected future market conditions after expiry of any current leases, as well as tenant failures during the course of a lease.

Maintenance costs: Including necessary investment to maintain functionality of the property for its expected useful life.

Capitalisation rates: Based on location, size and quality of the properties and taking into account market data at the valuation date.

Terminal value: Taking into account assumptions regarding maintenance costs, vacancy rates and market rentals.

The valuation methods applied by the independent valuers were the same as the prior year.

Fair value hierarchy

Fair value is the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date, regardless of whether that price is directly observable or estimated using another valuation technique. In estimating the fair value of an asset or a liability, the group takes into account the characteristics of the asset or liability if market participants would take those characteristics into account when pricing the asset or liability at the measurement date.

In addition, for financial reporting purposes, fair value measurements are categorised into level 1, 2 or 3 based on the degree to which the inputs to the fair value measurements are observable. The three levels are explained as follows:

Level 1 – inputs are quoted prices in active markets for identical assets or liabilities that the company can access at the measurement date. These quoted prices are unadjusted.

Level 2 – these are inputs, other than quoted prices included in level 1, that are observable for the asset or liability, either directly or indirectly.

Level 3 – inputs are unobservable inputs for the asset or liability.

  Recurring fair value
measurements – level 3
  June 2017
  June 2016
South Africa(1)        
Shopping centres 26 490 589   25 282 472  
Value centres 1 248 000   1 109 000  
Standalone offices 117 000   108 300  
Sub-Saharan Africa (excluding South Africa)        
Ikeja City Mall (Lagos, Nigeria) 1 969 744   2 322 426  
Total consolidated 29 825 333   28 822 198  
(1) Excludes property held-for-sale
  Non-recurring fair value
measurements – level 3
  June 2017
  June 2016
Assets held-for-sale 418 798   1 230 775  
Total consolidated 418 798   1 230 775  

Investment property held-for-sale was measured at fair value which, in instances where the property is already sold, but not yet transferred, is based on the sale price.

There are inter-relationships between unobservable inputs. Expected vacancy rates may impact the yield, with higher vacancy rates resulting in lower yields. An increase in future rental income may be linked with higher costs. If the remaining lease term increases, the yield may decrease.