Notes to the condensed financial statements

1 ACCOUNTING POLICIES

1.1 Basis of preparation

Estimates

Management discusses with the audit committee the development, selection and disclosure of the group’s critical accounting policies and estimates and the application of these policies and estimates. Actual results may differ from these estimates.

The revaluation of investment property requires judgement in the determination of future cash flows from leases and an appropriate reversionary capitalisation rate. Note 2.3 sets out further details of the fair measurement of investment property.

In determining the lease liability in accordance with IFRS 16, the incremental borrowing rate was estimated by management using the three-year DMTN margin as a starting point. The rate was adjusted to reflect an estimated spread for a tenor of 10 year, 25 years, and 50 years.

Judgements

Judgement is applied in certain areas based on historical experience and reasonable expectations relating to future events. Uncertainty around the future economic impact as a result of the COVID-19 pandemic has also been considered. Key areas of judgement are noted below:

Investments

As part of Edcon's restructure, Edcon approached its top 31 landlords, offering them the opportunity to subscribe for an equity interest in Edcon, or as an alternative, requested a 40.9% reduction in rental for a 24-month period commencing 1 April 2019. Vukile agreed to assist Edcon by subscribing for equity in Edcon on a quarterly basis. Management's best estimate of the fair value of the investment at 31 March 2020 is zero, resulting in a R15 million impairment.

Determining the lease term

In determining the lease term as per IFRS 16, management applies its judgement in considering all facts and circumstances that create an economic incentive to exercise an extension option, or not exercise a termination option. Extension options and periods after termination options are only included in the lease term if it is reasonably certain to be extended or not terminated.

1.2 Change in accounting policy

The only material impact of IFRS 16 – Leases relates to instances where Vukile leases land from a third party.

On adoption of IFRS 16, the group recognised lease liabilities in relation to land leases which had previously been classified as “operating leases” under the principles of IAS 17 – Leases. Under IAS 17, the lease expense was recognised in property expenses as incurred. Under IFRS 16, these liabilities were measured at the present value of the remaining lease payments, discounted using the lessee’s incremental borrowing rate as of 1 April 2019. Subsequently, each lease payment is allocated between the liability and finance cost. The finance cost is charged to profit or loss over the lease period so as to produce a constant periodic rate of interest on the remaining balance of the liability for each period.

On transition date, the corresponding right-of-use assets were measured at the amount equal to the lease liability. The right-of-use asset relating to land leases are subsequently remeasured at fair value in terms of IAS 40.

The group has also elected not to reassess whether a contract constitutes a lease at the date of initial application. Instead, for contracts entered into before the transition date, the group relied on its assessment made applying IAS 17 and IFRIC 4 – Determining whether an Arrangement contains a Lease.

In applying IFRS 16, the group has used the following practical expedients permitted by the standard:

  • operating leases with a remaining lease term of less than 12 months as at 1 April 2019 have been treated as short-term leases;
  • small ticket items have been accounted for as operating leases; and
  • the use of hindsight in determining the lease term where the contract contains options to extend or terminate the lease.

Payments associated with short-term leases and leases of low-value assets are recognised on a straight-line basis in the statement of profit or loss.

The group has elected the modified retrospective approach, thus not restating comparative periods.

2 FAIR VALUE MEASUREMENT

2.1 Fair value measurement of financial instruments

Financial assets and financial liabilities measured at fair value in the statement of financial position are grouped into three levels of a fair value hierarchy. The three levels are defined based on the observability of significant inputs to the measurement, as follows:

Level 1: quoted prices (unadjusted) in active markets for identical assets or liabilities.

Level 2: other than quoted prices included within level 1 that are observable for the asset or liability, either directly or indirectly.

Level 3: unobservable inputs for the asset or liability.

2.2 Fair value hierarchy

The following table presents financial assets and liabilities measured at fair value in the statement of financial position in accordance with the fair value hierarchy. The level within which the financial asset or liability is classified is determined based on the lowest level of significant input to the fair value.

  Reviewed
31 March 2020
 
Group Level 1
Rm
Level 2
Rm
Level 3
Rm
Total
Rm
 
Assets          
Equity investments at fair value  246  –  –  246    
Investments in associates at fair value  338  –  –  338    
Executive share scheme financial asset  35  –  –  35    
Derivative financial instruments  –  12  18  30    
Total  619  12  18  649    
Liabilities           –    
Executive share scheme financial liability  –  (17) –  (17)   
Derivative financial instruments  –  (1 060) (163) (1 223)   
Total  –  (1 077) (163) (1 240)   
Net fair value  619  (1 065) (145) (591)   
  Audited
31 March 2019
 
Group Level 1
Rm
Level 2
Rm
Level 3
Rm
Total
Rm
 
Assets          
Investments in associates at fair value  1 297  –  –  1 297    
Executive share scheme financial asset  72  –  –  72    
Derivative financial instruments  –  53  –  53    
Total  1 369  53  –  1 422    
Liabilities                
Executive share scheme financial liability  –  (45) –  (45)   
Derivative financial instruments  –  (316) (224) (540)   
Total  –  (361) (224) (585)   
Net fair value  1 369  (308) (224) 837    

There have been no significant transfers between levels 1, 2 and 3 in the reporting period under review.

Investment in associate at fair value

This comprises shares held in listed property securities (Fairvest) at fair value, which are determined by reference to quoted closing prices at the reporting date.

Executive share scheme financial assets and liabilities

This comprises equity-settled share-based long-term incentive reimbursement rights net of the equity settlement to staff, amortised over the vesting period, stated at fair value.

Equity investments at fair value

Unlisted equity investment: Vukile agreed to assist Edcon in its restructure by subscribing for equity in Edcon on a quarterly basis. At 31 March 2020, the fair value of the investment in Edcon was determined to be zero.

Listed equity investment: The fair value of shares held in listed property securities (Arrowhead) is determined by reference to the quoted closing price at the reporting date.

Derivative financial instruments

Level 2 derivatives consist of interest rate swap contracts, cross-currency interest rate swaps (CCIRS) and forward exchange contracts. The fair values of these derivative instruments are determined by Absa Capital, Rand Merchant Bank, Standard Bank, Nedbank, Investec Bank Limited, Banco Popular, Banco Santander and Caixabank using a valuation technique that maximises the use of observable market inputs. Level 3 derivatives consist of net settled derivatives and share warrants that have been valued using the Black Scholes option pricing model.

Measurement of fair value

The methods and valuation techniques used for the purpose of measuring fair value are unchanged compared to the previous reporting period.

2.3 Fair value measurement of non-financial assets (investment property)

The fair values of commercial buildings are estimated using a discounted cash flow approach which capitalises the estimated rental income stream, net of projected operating costs, using a discount rate derived from market yields. The estimated rental stream takes into account current occupancy levels, estimates of future vacancy levels, the terms of in-place leases and expectations of rentals from future leases over the remaining economic life of the buildings.

The most significant inputs are the discount rate and the reversionary capitalisation rate. The inputs used in the valuations were:

  Reviewed 31 March 2020   Audited 31 March 2019  
  Discount rate Reversionary
capitalisation rate
  Discount rate Reversionary
capitalisation rate
 
Group Range % Weighted average % Range % Weighted average %   Range % Weighted
average %
Range % Weighted
average %
 
Southern Africa 12.7 to 19.6 13.8 7.7 to 15.5 9.1   12.4 to 17.4 13.5 7.4 to 13.0 8.7  
Spain 7.3 to 9.0 8.0 5.0 to 9.3 6.1   7.0 to 9.0 7.9 5.0 to 9.2 6.0  

The discount rate and reversionary capitalisation rate range for the South African portfolio is wide. Accordingly, we have provided a disaggregation in the tables below.

For the Southern African portfolio, the discount rate and reversionary capitalisation rate has been disaggregated based on geography. The table below also illustrates the impact on valuations resulting from changes in net operating income (NOI).

Southern African directly held property portfolio Average
discount
rate
Average
exit
capitalisation
rate
Valuation
impact if
base
discount
rate is
increased
by 50bps
Valuation
impact of
50% NOI
reduction in
year one
Valuation
impact of
5% NOI
reduction in
capitali-
sation year
Valuation
impact of
5% NOI
reduction in
cash flow in
capitali-
sation year
 
Total portfolio 13.8% 9.1% (5.5)% (3.6)% (3.5)% (5.1)%  
Retail 13.8% 9.0% (5.5)% (3.6)% (3.5)% (5.1)%  
Other 14.0% 10.4% (5.0)% (4.1)% (2.9)% (5.2)%  
Gauteng 13.5% 8.9% (5.7)% (3.5)% (3.6)% (5.1)%  
KwaZulu-Natal 13.5% 8.7% (5.4)% (3.5)% (3.3)% (5.1)%  
Western Cape 13.2% 8.8% (5.7)% (3.5)% (3.5)% (5.1)%  
Free State 13.5% 8.7% (5.7)% (3.3)% (3.7)% (5.1)%  
Limpopo 14.2% 9.3% (5.1)% (4.0)% (3.3)% (5.0)%  
Eastern Cape 13.6% 8.8% (5.8)% (3.6)% (3.8)% (5.2)%  
Namibia 16.1% 11.5% (4.3)% (4.4)% (2.8)% (5.1)%  
North West 14.4% 9.5% (5.4)% (3.7)% (3.4)% (5.1)%  
Mpumalanga 14.9% 10.3% (5.1)% (4.2)% (3.5)% (5.2)%  

The above information has been further disaggregated based on risk (discount rates). Refer to the following three tables:

Discount rate below 14% Portfolio
exposure
Average
discount
rate
Average
exit
capitali-
sation rate
Valuation
impact if
base
discount
rate is
increased
by 50bps
Valuation
impact of
50% NOI
reduction
in year
one
Valuation
impact of
5% NOI
reduction
in
capitali-
sation
year
Valuation
impact of
5% NOI
reduction
in cash
flow in
capitali-
sation
year
 
Total portfolio 58% 13.0% 8.3% (5.9)% (3.3)% (3.6)% (5.1)%  
Retail 58% 13.0% 8.2% (5.9)% (3.3)% (3.6)% (5.1)%  
Other 55% 13.1% 9.2% (5.6)% (3.7)% (2.6)% (5.2)%  
Gauteng 68% 13.0% 8.3% (6.0)% (3.3)% (3.7)% (5.1)%  
KwaZulu-Natal 71% 13.2% 8.3% (5.5)% (3.4)% (3.2)% (5.1)%  
Western Cape 60% 12.7% 8.2% (6.2)% (3.2)% (3.5)% (5.2)%  
Free State 62% 13.2% 8.2% (6.0)% (3.1)% (3.7)% (5.0)%  
Limpopo 40% 12.7% 8.0% (6.1)% (3.2)% (3.7)% (5.0)%  
Eastern Cape 49% 13.2% 8.2% (6.2)% (3.4)% (3.9)% (5.2)%  
North West 64% 13.2% 8.3% (5.9)% (3.3)% (3.7)% (5.0)%  
Discount rate between 14% and 16% Portfolio
exposure
Average
discount
rate
Average
exit
capitali-
sation rate
Valuation
impact if
base
discount
rate is
increased
by 50bps
Valuation
impact of
50% NOI
reduction
in year
one
Valuation
impact of
5% NOI
reduction
in
capitali-
sation
year
Valuation
impact of
5% NOI
reduction
in cash
flow in
capitali-
sation
year
 
Total portfolio 35% 14.4% 9.7% (5.1)% (3.9)% (3.4)% (5.1)%  
Retail 36% 14.4% 9.6% (5.1)% (3.9)% (3.4)% (5.1)%  
Other 33% 14.7% 11.6% (4.3)% (4.4)% (3.2)% (5.1)%  
Gauteng 26% 14.2% 9.8% (5.2)% (3.8)% (3.6)% (5.1)%  
KwaZulu-Natal 29% 14.5% 9.6% (5.1)% (3.7)% (3.6)% (5.0)%  
Western Cape 40% 14.0% 9.8% (5.1)% (3.9)% (3.5)% (5.1)%  
Free State 38% 14.0% 9.4% (5.3)% (3.6)% (3.6)% (5.1)%  
Limpopo 48% 14.9% 10.0% (4.4)% (4.5)% (2.9)% (5.1)%  
Eastern Cape 51% 14.0% 9.3% (5.4)% (3.8)% (3.7)% (5.2)%  
Namibia 69% 15.2% 10.2% (4.5)% (4.1)% (2.7)% (5.0)%  
North West 25% 15.0% 10.0% (5.0)% (4.0)% (3.5)% (5.1)%  
Mpumalanga 67% 14.3% 9.4% (5.5)% (3.9)% (3.8)% (5.3)%  
Discount rate above 16% Portfolio
exposure
Average
discount
rate
Average
exit
capitali-
sation rate
Valuation
impact if
base
discount
rate is
increased
by 50bps
Valuation
impact of
50% NOI
reduction
in year
one
Valuation
impact of
5% NOI
reduction
in
capitali-
sation
year
Valuation
impact of
5% NOI
reduction
in cash
flow in
capitali-
sation
year
 
Total Portfolio 7% 17.0% 12.6% (4.0)% (5.0)% (3.1)% (5.1)%  
Retail 6% 17.1% 12.6% (4.1)% (4.9)% (3.1)% (5.1)%  
Other 12% 16.3% 12.8% (4.0)% (5.0)% (2.9)% (5.2)%  
Gauteng 6% 16.3% 11.9% (4.2)% (4.9)% (3.2)% (5.1)%  
Limpopo 12% 16.3% 11.3% (4.5)% (4.4)% (3.4)% (5.2)%  
Namibia 31% 18.1% 13.7% (3.7)% (5.3)% (3.1)% (5.1)%  
North West 11% 19.6% 15.5% (3.4)% (5.5)% (1.5)% (5.1)%  
Mpumalanga 33% 16.3% 12.1% (4.2)% (4.8)% (3.1)% (5.2)%  

The estimated fair value would increase/(decrease) if the expected market rental growth was higher/(lower), expected expense growth was lower/(higher), the vacant periods were shorter/(longer), the occupancy rate was higher/(lower), the rent-free periods were shorter/(longer), the discount rate was lower/(higher) and/or the reversionary capitalisation rate was lower/(higher).

The effect of a 25 basis point (bps) change to the base discount rate will have the following impact on the 31 March 2020 value of the portfolio:

  25bps increase 25bps decrease  
  Fair value
Rm
Decreased
fair value
Rm
Decrease
Rm
%
decrease
Increased
fair value
Rm
Increase
Rm
%
increase
 
Southern Africa(1) 15 621 15 182 (439) (2.8) 16 105 484 3.1  
  Fair value
€m
Decreased
fair value
€m
Decrease
€m
%
decrease
Increased
fair value
€m
Increase
€m
%
increase
 
Spain 16 481 16 175 (306) (1.8) 16 797 316 1.9  
(1) Fair value excludes non-controlling interest in Clidet No 1011 (Pty) Ltd, which owns 80% of Moruleng Mall.

The following table reflects the levels within the hierarchy of non-financial assets measured at fair value:

  Reviewed
31 March 2020
Recurring
fair value
measurements
Level 3
Rm
  Audited
31 March 2019
Non-recurring
fair value
measurements
Level 3
Rm
 
Investment property 35 522   29 518  
Right-of-use asset 214    
Investment property under development   163  
  Reviewed
31 March 2020
Non-recurring
fair value
measurements
Level 3
Rm
  Audited
31 March 2019
Non-recurring
fair value
measurements
Level 3
Rm
 
Investment property held for sale   1 002  

3 RELATED-PARTY TRANSACTIONS AND BALANCES

      Reviewed 2020   Audited 2019  
  Type of transaction   Amount
paid/
(received)
by Vukile
Rm
Amount
owed
to/(by)
related
parties
Rm
  Amount
paid/
(received)
by Vukile
Rm
Amount
owed
to/(by)
related
parties
Rm
 
Group companies                
MICC Property Income Fund (MICC IF) Asset management fees(1)            46  –    
MICC IF  Debenture interest     (165)      (156) –    
MICC IF  Loan            –  37    
MICC IF  Corporate administration recovery(2)            (2) –    
MICC Properties  Corporate administration recovery(2)            (3) –    
MICC Properties  Interest received     (23) (261)    (34) (341)   
MICC Properties  Interest paid            –    
MICC Namibian subsidiaries  Interest paid(3)            –    
Clidet No. 1011  Dividends received     (17)      (8) –    
Clidet No. 1011  Interest received     (25) (285)    (26) (284)   
Castellana  Interest received     (7)      –  –    
Morzal Properties Iberia S.L (Morzal) Initial investment in Morzal            3 630  –    
Vukile ALP 1 Pty Ltd  Dividends received     (6)      –  –    
Vukile ALP 2 Pty Ltd  Dividends received     (6)      –  –    
Vukile ALP 3 Pty Ltd  Dividends received     (1)      –  –    
Vukile ALP 1 Pty Ltd  Interest received     (26) (364)    –  (367)   
Vukile ALP 2 Pty Ltd  Interest received     (26) (364)    –  (367)   
Vukile ALP 3 Pty Ltd  Interest received     (13) (180)    –  (181)   
Atlantic Leaf Properties Limited  Dividend received     (102)      (109) –    
Fairvest Property Holdings Limited  Dividend received     (59)      (54) –    
Arrowhead Properties Limited  Dividend received     (85)      (72) –    
Investment in Castellana  Dividend received     (430)      (290) –    
Castellana Westbrooke/Morzal Properties Iberia S.L (Morzal) Dividend received     (20)      (49) –    
Other related parties                         
Diversified Real Estate Asset Management (DREAM) Share warrant     –  –     18  –    
Diversified Real Estate Asset Management (DREAM) Refund of salary costs and expenditure incurred in assisting DREAM in preparation of feasibilities, negotiation with debt funders, and review of loan and sale agreements with reference to the acquisition of 11 retail parks (expense recovery at cost)    –  –     (17) –    
Directors and other officers  Interest     (19) (266)    (13) (271)   
Executive directors  Remuneration     50  –     52  –    
Key management (excluding directors) Remuneration     15  –     34  –    
(1) Fees paid by Vukile for the management of the group’s property portfolios by MICC IF.
(2) Allocation of corporate and administration costs paid to Vukile
(3) Market-related interest paid by Vukile on listed commercial paper issued to its Namibian subsidiaries.

Related parties comprise the company’s subsidiaries, associates and key management.

Refer to the commentary section of this report for information regarding revenue from external customers, repayment of debt, dividends paid, and comments about the impact of COVID-19.