Chairman's report

MICHAEL AITKEN, CHAIRMAN

OVERVIEW

The past year proved significant for the JSE All Share Index (ALSI), which achieved record highs on both foreign and local investor interest. This was driven in part by the search for yield by foreign investors who, faced with low or no interest rate environments, were looking to invest in equities and other yield-generative assets in overseas markets. South African listed property had another very good year, producing returns in excess of 30% largely as a result of strong capital markets. However, lower than expected GDP growth of 2,5% in 2012 is indicative of the insufficient impetus in the South African economy when compared with other emerging markets and, in particular, the rest of Africa.

Contrary to leading indicators such as growth in GDP, consumer spending remained buoyant for much of the year, with retail sales growth surprising on the upside and most retailers posting strong results. This growth rate is likely to moderate in the months ahead as consumers become more cautious about spending on non-essential items, and the proposed tightening of the National Credit Act limits credit sales growth.

Listed property, with a market capitalisation of R210 billion, was the best performing South African asset class in 2012, yielding a total return of 35,9%. The sector outperformed general equities, cash and bonds over five (15,9%) and nine years (23,8%). Hyprop performed well within the top quartile of the sector, producing a total return of 44,8%, comprising an income return of 6,3% and a capital return of 37,9%.

As South Africa’s largest listed shopping centre fund, with 11 directly owned shopping centres, Hyprop’s premium regional and super regional shopping centres continued to demonstrate their core strength. With the benefit of key locations and the consistent application of proven management strategies, turnover density increased by an average of 7% over the prior year. Overall national growth in retail sales was 4,3% over the same period.

2012 Strategic highLightS

The bedding down of the Attfund Retail portfolio, including the integration of the respective management teams and information systems, was a singular success. Full credit is due to our executives for this.

The redevelopment of Rosebank Mall at a total cost of R920 million has commenced with final completion expected by September 2014. The centre will remain operational during construction. The Rosebank node presents an exciting mixed-use development opportunity, and pre-letting of the mall has been well received by all leading retailers including Woolworths, the first Edgars store in Rosebank and Dis-Chem. The refurbishment is in line with the group’s strategy of expanding of existing shopping centres in our retail portfolio.

In line with its Africa investment strategy, Hyprop obtained exchange control approval to co-invest with the Atterbury Group in a Mauritian based property investment company, Atterbury Africa Limited. Hyprop’s initial shareholding is 37,5%, with a commitment to invest R750 million into the fund over the next five years. The primary goal is to develop and own quality shopping centres in select African countries with attractive medium term GDP growth, earning a US dollar based income stream for the group.

Amongst the year’s successful disposals was Southern Sun Hyde Park, which was sold to the hotel operator Tsogo Sun for R130 million. The sale was effective 1 September 2012 and transfer is expected during 2013. Further strategic disposals included the Trade Centre property located within the CapeGate precinct for R70 million and Hyprop’s 50% interest in Southcoast Mall which was sold to Redefine Properties for R110,5 million. Both transfers have been registered.

With respect to listed property investments, Hyprop sold its stakes in Vunani and Acucap for a combined R209 million, leaving it with a 34% shareholding in Sycom valued at R2,3 billion. While not considered to be a long-term investment, Sycom remains an important asset with value still to be unlocked. At year-end we had commenced discussions with Sycom, with a view to converting the investment to direct property.

reitS

Following more than six years of consultation between National Treasury and the listed property sector, a formal announcement on Real Estate Investment Trust (REIT) legislation was made on 25 October 2012. With effect from 1 April 2013, any qualifying company with a tax year beginning on or after 1 April 2013 can convert to a REIT, subject to compliance with the JSE Listings Requirements.

The introduction of REITs will result in an alignment of the South African listed property sector with internationally traded real estate investments. in addition it will facilitate the comparison to, and inclusion in, international indices.

The REIT framework will have the added advantage of providing tax certainty, with REITs exempt from capital gains tax on the disposal of fixed property and REIT securities.

The proposed REIT legislation will likely result in elimination of the linked share debenture structure currently utilised by property loan stock companies, including Hyprop.

Hyprop intends to convert to a REIT in the year ahead following finalisation of new JSE rules for REITs. Unitholders will be informed in due course.

Economic outlook

The global economy should support capital inflows into emerging markets over the foreseeable future. Unattractive growth rates in developed economies compared with more attractive rates in emerging markets should ensure this. However, developed global markets could surprise with stronger than expected growth once the shifting sentiment around the US debt ceiling and automatic fiscal spending cuts are settled.

For South Africa, a major challenge lies in addressing the large current account deficit continuing into 2013, which reflects the weak GDP growth. Production and exports are slowing while spending and imports continue to increase. These factors are already exposing the rand’s vulnerability against major currencies and will impact the outlook for inflation in 2013 and beyond. This will in turn make further monetary easing by the Reserve Bank more difficult, with the likelihood of stable interest rates for the year.

These economic conditions underpin expectations of a challenging year ahead in South Africa. GDP growth is expected to underperform at 2,6%, while the average inflation rate is expected to stay within the target range of 6%. It is regrettable that South Africa faces these challenges when opportunities for success abound. It is hoped that the many, urgent calls for constructive leadership are heeded in order for the economy to start recovering.

At a property level, above inflation increases in administered charges such as rates and electricity tariffs will continue to dampen real rental growth, and space optimisation will become increasingly important for tenants seeking to balance rental costs against turnover. Given this and the macro economic outlook, retail market rentals are expected to grow by between 4% and 8%. Total returns from listed property, while still well ahead of inflation, will be off previous highs in a forecast range of 8% to 15%.

Prospects

Hyprop’s strategy is to continue building on its portfolio of dominant shopping centres in core locations in South Africa and elsewhere in Africa, and to continue offering the very best retail experience to its target market.

There will be continued focus on the disposal of non-core assets, the expansion and redevelopment of existing centres and improvements in operational efficiencies. Attention will also be given to alternative forms of finance to further reduce the overall cost of debt.

Hyprop has the benefit of a motivated management team which, combined with Hyprop’s asset selection and management skills, will enable the group to meet its primary objective of providing sustainable income growth and capital appreciation to investors over the long term.

Sustainability

We remain committed to sustainability and have implemented a number of initiatives during the year to enhance stakeholder engagement, improve environmental reporting and ensure good corporate citizenship. These aspects are addressed in this integrated report.

Corporate governance

In line with Hyprop‘s commitment to continually improving corporate governance, the total number of independent non-executive directors has increased to six, or 50% of the total complement of non-executive directors on the board. Jabu Mabuza was appointed to the board on 21 June 2012 as an independent non-executive director, and Gavin Tipper earlier in the year on 8 March 2012. Gavin was subsequently appointed a member of the audit committee and chairman of the remuneration and nomination committee.

farewell

It is my intention to retire at the forthcoming annual general meeting on 27 June. This is therefore my final report to unitholders. The past 13 years have truly been a success story and some of the most rewarding for me personally, having witnessed the market capitalisation of Hyprop grow from R0,3 billion to R17,7 billion and distributions to unitholders grow at an average compound rate of 10,8% per annum. This is a track record of which we can all be extremely proud.

Appreciation

I wish to thank the Hyprop executive for their enduring support in particular, Pieter Prinsloo and Laurence Cohen, who have both been exemplary leaders of the company. My thanks also go to the board of directors as a whole, past and present, who have all contributed to making my journey worthwhile. To our many other stakeholders including our unitholders, thank you too for your support.

The election of a new chairman will be decided by the board and an announcement made in this regard in due course.

I wish everyone well in their ongoing association with Hyprop.

Michael Aitken
(Outgoing) Chairman