Risk

The board’s responsibility

Hyprop’s systems of internal control are designed to provide reasonable, but not absolute assurance as to the integrity and reliability of the financial statements. The systems are designed to manage rather than eliminate applicable risks. They are intended to safeguard, verify and maintain accountability of Hyprop’s assets. They are further intended to identify and minimise significant fraud, potential liability, loss and material misstatement while complying with applicable laws and regulations. Review and approval of the efficacy of the systems of internal control is the responsibility of the board, assisted by the audit and risk committees.

Internal audit

The audit and risk committees are assisted by management reporting and periodic reviews as well as KPMG, to whom the internal audit function has been outsourced. The committees report to the board on the findings of the internal audit function.

The board is responsible for the company’s systems of internal control. The effectiveness of these systems is monitored by both the audit and risk committees, which are assisted by management reporting and by an outsourced internal audit function.

The committees report to the board on findings. This process has been subject to regular review over a number of years, resulting in ongoing refinements.

In selecting a service provider for outsourced internal audit, Hyprop considered factors such as:

KPMG’s internal audit services were selected, and are in full compliance with international best practice. The services are provided by a separate, specialised division within KPMG.

The primary focus of the internal audit at Hyprop is the major risks impacting the company’s strategic and business objectives.

Management’s responsibility for risk management

Executive management implements controls to ensure the validity, accuracy and completeness of financial information. These controls are reviewed by internal and external audit when reliance is placed on the controls. External audit reports on the fair presentation of financial information at statutory reporting level. On an operational level, this is done by the executive committee.

RISK COMMITTEE

The committee reports directly to the board. It is responsible for reviewing and assessing the company’s risk control systems and ensuring that risk policies and strategies are effectively managed.

Specifically the role of the committee is to assist the board in ensuring that:

It meets twice a year and attendance is outlined in the integrated report

The committee is responsible for overseeing the development, effective implementation and annual review of a risk management plan. It makes recommendations to the board (which retains ultimate responsibility) with regard to risk tolerance levels. Risk management is effected by the board, the executive committee and centre management.

Formal terms of reference outlining the committee’s purpose, composition and responsibilities are set out in a risk committee charter.

Risk committee charter

The committee must perform all the functions as are necessary to fulfil its role as stated above, including the following:

The table below sets out the main risks identified through our risk management process. It also provides mitigation plans. We have not ranked the risks in order of priority as all are considered important.

Risk matrix

	Risk	Impact		Mitigation		Change from 2012		Comments
	Property market conditions
	Slowdown in consumer spend negatively impacting on retailers' trading densities	• Inability to pay rent • Reduction in distributions to unitholders		• Keeping shopping centres of the highest quality to encourage consumer spend in Hyprop centres				Currently, affordability remains high as shown by the rent to turnover ratio of 7,2% across the portfolio
	Oversupply of rentable space	• Vacancies for long periods		• Rentals at competitive rates • Shopping centres of superior quality				Occupancy is at 97,5%
	Reduction in property values	• Inability to acquire funding • Breach of loan covenants		• Refresh, recapitalise and redevelop assets • Consider disposal where long-term growth prospects are impaired				Strong demand for quality assets
	Strategy and execution
	Incorrect investment strategy	• Lower returns and distributable income • Inefficient utilisation of existing funding facilities		• Board approval of strategies • Detailed analysis and research undertaken prior to approval
	Inability to enhance quality of assets to ensure sustainable distribution growth	• No sustainable distribution growth		• Refresh, recapitalise and redevelop assets • Consider disposal where long-term growth prospects are impaired
	Development and acquisitions
	Inability to deliver developments on time and within budget	• Lower yields and lower investment returns • Lower distributable income		• Detailed analysis and research undertaken prior to approval of extensions • Dedicated development executive • Use of reputable consultants, contractors and professionals to ensure timely delivery				Rosebank Mall re-development on track
	Negative impact of extensions to existing operations/income during construction	• Lower footcount during construction and longer period for centre to recover after a major extension, resulting in lower distributable income		• Detailed analysis and research is undertaken prior to approval of extensions • Use of reputable consultants, contractors and professionals with experience in this field to ensure as little disruption to the centre as possible • High degree of involvement by management in project planning and implementation
	Acquisitions not in line with strategy and failure to achieve estimated investment returns	• Lower returns and distributable income • Inefficient utilisation of existing funding facilities		• Approval of acquisitions by investment committee • Detailed analysis and research undertaken prior to approval of acquisitions
	Treasury
	Lack of available funding	• Inability to pursue investment opportunities		• Maintaining conservative loan to value ratios • Ensuring available funding to cover capital requirements				R5 billion debt capital market programme in place. Moody's rating: A3.za / P-2.za
	Reduction in values/net income forcing breach of financing covenants	• Bank funding will become repayable immediately		• Ratios and values are consistently monitored • Utilising unsecured debt capital market programme
	Interest rate increases	• Increased borrowing costs and reduced distributable income		• 87% of bank funding fixed with an average maturity of 4,3 years • Staggering of fixed interest rate expiries in one year				Due to weakening of bond market, long-term interest rates increased
	Currency risk	• Reduced distributable income		• Matching of off-shore funding with off-shore income (USD).				Hyprop increased its investment in Atterbury Africa to R337 million (USD 34 million)
	Operations
	Lease renewals and tenant retention. Significant volume of leases expiring in any one period	• Prolonged periods of vacant space in shopping centre • New lettings at below market rentals • Decrease in distributable income and under achieving budget expectations		• Proactive management of lease expiries • Monthly lease expiry reports to Exco • Close engagement with tenants throughout their tenure • Staggering of major lease expiries
	Incomplete lease documentation	• Invalid lease documentation can impair landlord’s enforceability of its rights		• Standardised lease documentation between landlord and tenant • Monthly monitoring of documentation status				This is monitored by the National Legal Executive
	Tenant failure and ability to pay rent	• Prolonged period of vacant space • Reduction in distributions		• Close engagement with tenants throughout their tenure • Credit checks prior to conclusion of lease agreements • Adequate security from tenants
	Inability to maintain the quality of assets	• Difficulty in retaining tenants and tenants signing at lower than market rentals • Valuation of buildings decreasing and inability to acquire additional funding		Extensions and regular upgrades   Dedicated technical manager ensures assets are well maintained • Maintenance programmes approved and reviewed regularly • Annual capital allowances for improvements
	Inability to adequately insure assets	• Damage from disaster/fire • Loss of income and riot risk		• Properties all insured based on replacement cost as well as loss of income • Adequacy of insurance cover regularly reviewed
	Reputational and brand risk when asset does not comply with customer expectations	• Increase in vacancies • Loss of distributable income		• All properties owned are of a high quality • Close engagement with tenants to foster a good relationship
	Increases in municipal cost charges	• Reduced distributions as tenants fail to contribute to their portion of the charge • Lower rentals to ensure certain tenants are retained		• Planning and implementing methods to measure and reduce consumption • Engaging actively with local authorities to contest excessive rates increases				Ongoing programmes in place to reduce consumption
	Deterioration of municipal administration and service delivery	• Delayed plan approvals for development and extension of assets • Delays in property transfers for acquisitions and disposals • Extended periods without electricity and tenants not trading efficiently		• Privatising meter reading and utility recovery • Working closely with professional consultants to optimise local authority approval processes
	Failure to recruit and retain key executives and staff	• Impairment of company's ability to implement its strategic objectives		• Retention strategy taking into account performance incentives, remuneration benchmarking, performance evaluation, personal development plans • Succession plans reviewed regularly				Introducing a long-term incentive scheme for executive directors and senior management during 2013
	Health, safety and environmental compliance	• Potential legal claims • Withdrawal of insurance cover or increase in insurance premiums • Fines for non-compliance		• Regular training regarding OHS act • Independent audits to ensure compliance • Dedicated staff to ensure compliance at all times
	Effectiveness of internal controls	• Possibility of fraud and inaccurate financial data		• Internal controls reviewed on a regular basis • Internal audits performed on an annual basis and reported back to the audit committee
	Compliance risk
	Failure to comply with legislation	• Fines and penalties • Reputational loss		• Legal executive employed to review legislative compliance • Compliance reviewed by risk committee				There have been no incidences of non-compliance
	Information technology
	Disaster recovery plan	• Disruptions on operations • Loss of critical management information • Delays in billing and collection of rentals		• Internal audit performed on IT governance and controls • Risks identified and addressed • Daily backups • Centralised system

Key:

Risk increased from 2011

Risk decreased from 2011

Risk unchanged

Refer to section on IT governance