Chairman's report

Gavin Tipper, CHAIRMAN

Overview

The long awaited South African REIT legislation became effective in April 2013 and a number of prominent property companies have announced their conversion to REIT status. Hyprop became a REIT with effect from 1 July 2013 necessitating a change to the company’s financial year-end and the production of a second integrated report within a six month period.

South African economic growth remained sluggish for the first six months of 2013. This was in line with our major trading partners whose economies are starting to show signs of recovery but who are still subject to very low rates of growth. Locally, consumer confidence is constrained and spending growth is moderating as growth in disposable income slows and banks limit unsecured lending to households. While this has resulted in slower retail sales growth, it is reassuring that a number of national retailers and certain international brands have proved fairly resilient.

Recent indications that the Federal Reserve may begin to taper its quantitative easing programme have resulted in a level of repricing in emerging countries' financial markets. The Rand weakened, local bond yields have risen and foreigners were net sellers of South African bonds in June and July. Although the latest decision by the Federal Reserve to delay the process of tapering will provide ongoing support to markets, the impact of the tapering when it commences is concerning in the context of South Africa’s large twin deficits and external financing requirements.

Despite international developments, growth in the South African listed property sector continued during the six month period with a total return of 8,76%. Hyprop produced a total return of 9,86%. The sector continues to be buoyant with a number of property entities raising significant amounts of capital during the period.

Highlights

After a busy 2012 there has been considerable focus on optimising the portfolio. Our operational metrics are showing improvements, a number of enhancements to properties have been completed and there will be further improvements to the portfolio going forward.

The R932 million redevelopment of the Rosebank Mall continued during the period. The redevelopment remains on track for completion in September 2014, however material portions of the centre will be brought into operation prior to that date. There has been a strong rejuvenation of the Rosebank node and we are excited about the unique retail offering the redevelopment will bring to this.

The company has exchanged the majority of its shareholding in Sycom for Somerset Mall. The transaction, which became effective on 1 October 2013, was priced on an income for income basis resulting in an acquisition at fair value, but nonetheless represents an exciting opportunity for Hyprop to convert a passive investment into a high quality operating asset with upside potential.

Hyprop’s investment into African retail via Atterbury Africa is progressing strongly. Existing developments are on track and there is a pipeline of exciting opportunities. Given the high levels of competition for quality retail assets in the South African market, and the lack of available assets at prices which would support investment, the African portfolio will be an important source of growth going forward. Investments will however be made selectively having regard for country and other risks.

The company has made progress in restructuring its debt, reducing its finance costs and optimising the tenure of the debt. While this will remain an area of focus going forward, there has been a tightening in the corporate debt markets and future funding costs are likely to be higher.

Outlook

Despite the consistently gloomy views on the South African economy expressed by a number of market commentators, the listed property sector has shown strong growth in recent years. The continuation of this growth will be partly dependent on international markets and, specifically, on any tapering of the United States’ quantitative easing programme, and the pace thereof. All emerging market economies will be impacted by lower international liquidity; the extent to which that impact is moderated in any particular country will be, inter alia, a function of the relative health of that country’s economy and the quality of its government and political leadership.

Fundamentally, Hyprop is well positioned. We have an enviable portfolio of shopping centres, which should prove resilient regardless of stock market volatility. We have a high quality tenant base and considerable effort is devoted to improving the mix. Management will continue to dispose of non-core assets and revenue and costs will remain a core focus. While broad based measures of South African inflation remain at reasonable levels, increases in administered charges have consistently exceeded published inflation rates and the management of these charges is a significant challenge for landlords and tenants.

The company has invested significantly in redevelopments, particularly in the Rosebank Mall, has acquired Somerset Mall and has invested in African property. Prime South African assets are relatively scarce and are fully priced when they are brought to a highly competitive market; accordingly we will continue to enhance existing assets where viable and target local assets where we see value. In addition, Hyprop will increase the level of its African investments over the next year.

The company proposed a long term incentive scheme for its executive directors and senior management to unitholders during the period. Unfortunately the scheme did not attract the required support. The lack of an appropriate long term incentive scheme is a weakness in a South African economy where there is a shortage of quality senior skills and we will propose an amended scheme, taking account of input from unitholders, at the company’s next annual general meeting.

In line with Hyprop’s conversion to a REIT, a resolution to simplify the company’s capital structure will be presented to unitholders in due course.

Sustainability

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

Corporate governance

Hyprop remains committed to the highest standards of corporate governance. There are substantial related disclosures in this integrated report.

Board changes

It is with regret that we notified unitholders of the passing of Les Weil on 28 June 2013. Les had been a director of Hyprop since 2003. He made a significant contribution to Hyprop and to the South African property industry, and will be sorely missed. Our condolences go to Les’ family.

Michael Aitken resigned as a director and as chairman of the company on 27 June 2013. Mike has been a director of Hyprop since August 2000 and chairman since 2007. Mike’s wisdom and steady hand will be sorely missed. We thank him for his contribution and wish him well in his future endeavours.

Marc Wainer resigned on 27 June 2013 after 11 years on the Hyprop board. Marc is an icon in the South African property industry and made a considerable contribution to the company during his tenure as a director. We will miss Marc’s guidance and counsel and thank him for all he has done for Hyprop. We wish him well as he focuses on Redefine Properties.

Jabu Mabuza resigned on 27 June 2013 to devote himself to his responsibilities as chairman of Telkom. We thank him for his contribution to Hyprop and wish him well as he confronts some important challenges.

On 28 August 2013, Thabo Mokgatlha joined the board as an independent non-executive director and a member of the audit commitee. We welcome Thabo to the Hyprop board and look forward to a long and productive relationship.

Appreciation

On behalf of the board I would like to thank our executives, management and staff for their considerable efforts during the period. I also offer our thanks to our different stakeholders for their support and my thanks to my fellow board members for their contribution.

Gavin Tipper
Chairman