Notes to the condensed financial statements
for the six months ended 30 September 2021

1 GENERAL 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 determining discount rates and an appropriate reversionary capitalisation rate. Note 2.3 sets out further details of the fair value 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 tenure of 10 years, 25 years and 50 years.

Judgements

Judgement is applied in certain areas based on historical experience and reasonable expectations relating to future events. Management applied judgement in assessing whether certain assets qualify to be classified as held for sale. In management’s opinion, the following assets met all the IFRS 5 requirements and are classified as held for sale:

  • Centurion Samrand N1
  • Shoshanguve Batho Plaza
  • Makhado Nzhelele Valley Shopping Centre
  • The five shopping centres indirectly owned by MICC Properties Namibia (Pty) Ltd
1.2 NEW STANDARDS AND AMENDMENTS
 

The group has adopted the following new standards, or amendments to standards which were effective for the first time for the financial period commencing 1 April 2021:

1.2.1 Management has assessed the changes to IFRS 7 relating to the interest rate benchmark reform which is to result in amendments to the following standards:
 
  • Amendments to IFRS 7 – Financial Instruments: Disclosures;
  • Amendments to IFRS 9 – Financial Instruments; and
  • IFRS 16 – Leases.

IFRS 7 – Financial Instruments: Disclosure relates to instances where interbank offered rates (IBORs) are expected to be replaced by an alternative benchmark. This amendment permits the continuation of hedge accounting for such hedge relationships for phase 1. This will have no impact on the group.

1.2.2 Management has assessed the changes to IFRS 16 – Leases in respect of COVID-19-related rent concessions providing lessees with an exemption from assessing whether a COVID-19-related rent concession was a lease modification. The amendment had no impact on the group.

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.

   30 September 2021 
Group  Level 1 
Rm
 
Level 2 
Rm
 
Level 3 
Rm
 
Total 
Rm
 
Assets             
Investment in associate at fair value  470  –  –  470 
Equity investment at fair value  568  –  –  568 
Executive share scheme financial asset  95  –  –  95 
Derivative financial instruments  –  132  –  132 
Total  1 133  132  –  1 265 
Liabilities             
Executive share scheme financial liability  –  (40) –  (40)
Derivative financial instruments  –  (268) (409) (677)
Total  –  (308) (409) (717)
Net fair value  1 133  (176) (409) 548 
   30 September 2020  31 March 2021 
Group  Level 1 
Rm 
Level 2 
Rm 
Level 3 
Rm 
Total 
Rm 
Level 1 
Rm 
Level 2 
Rm 
Level 3  
Rm 
Total 
Rm 
Assets                         
Investment in associate at fair value  149  –  –  149  538  –  –  538 
Equity investment at fair value  425  425  309  –  –  309 
Executive share scheme financial asset  32  –  –  32  57  –  –  57 
Derivative financial instruments  –  14  14  28  –  214  215 
Total  606  14  14  634  904  214  1 119 
Liabilities                         
Executive share scheme financial liability  –  (10) –  (10) –  (26) –  (26)
Derivative financial instruments  –  (1 112) (296) (1 408) –  (578) (202) (780)
Total  –  (1 122) (296) (1 418) –  (604) (202) (806)
Net fair value  606  (1 108) (282) (784) 904  (390) (201) 313 

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 a listed property company (Fairvest) at fair value, which is determined by reference to the quoted closing price at the reporting date.

Equity investment at fair value

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.

Executive share scheme financial assets and liabilities

This comprises equity-settled share-based long-term incentive reimbursement rights stated at fair value. The level 1 asset is determined with reference to Vukile's share price.

Derivative financial instruments

Level 2 derivatives consist of interest rate swap contracts, cross-currency interest rate swaps and forward exchange contracts. The fair values of these derivative instruments are determined by Vukile’s and Castellana’s bank funders, 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 to measure fair value are unchanged compared to the previous reporting period.

2.3 FAIR VALUE MEASUREMENT OF NON-FINANCIAL ASSETS (INVESTMENT PROPERTY)
 

At 30 September 2021, the directors valued the Southern African property portfolio at R15.3 billion (31 March 2021: R15.6 billion), and an external valuer valued the Spanish portfolio at R17.0 billion (31 March 2021: R17.1 billion).

The external valuations performed by Quadrant Properties (Pty) Ltd and Knight Frank (Pty) Ltd at 30 September 2021 on 44% of the Southern African portfolio were in line with the directors’ valuations. The Spanish portfolio was valued by Colliers International.

The fair values of commercial buildings are estimated using a DCF method, 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 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 most significant inputs are the discount rate and the reversionary capitalisation rate. The inputs used in the valuations were:

  Unaudited 30 September 2021 Audited 31 March 2021
  Discount rate % Reversionary
capitalisation rate %
Discount rate % Reversionary
capitalisation rate %
  Range Weighted
average
Range Weighted
average
Range Weighted
average
Range Weighted
average
Southern Africa 12.7 to 19.6 13.7 7.8 to 15.3 9.2 12.7 to 19.6 13.8 7.7 to 15.3 9.2
Spain 7.3 to 9.3 8.2 5.0 to 7.0 6.2 7.3 to 9.0 8.2 5.0 to 9.3 6.2

Pending normalisation post the global COVID-19 pandemic and the recent unrest in SA, assumptions regarding cash flows, expected growth rates, and discount rates are consistent with the previous reporting period.

SOUTHERN AFRICA

The discount rate and reversionary capitalisation rate have 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 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 100.0 13.7 9.2 (5.3) (4.2) (3.4) (5.1)
Retail 95.0 13.7 9.1 (5.3) (4.1) (3.5) (5.1)
Other 5.0 14.2 10.8 (4.9) (4.6) (2.7) (5.2)
Gauteng 39.0 13.6 9.1 (5.4) (4.1) (3.5) (5.1)
KwaZulu-Natal 19.0 13.4 8.7 (5.3) (4.0) (3.3) (5.0)
Free State 8.0 13.2 8.6 (5.7) (3.9) (3.6) (5.0)
Western Cape 8.0 13.2 9.1 (5.4) (4.1) (3.4) (5.1)
Limpopo 7.0 14.2 9.5 (4.9) (4.6) (3.3) (5.0)
Eastern Cape 7.0 13.6 8.9 (5.5) (4.0) (3.6) (5.0)
Namibia 5.0 15.9 11.5 (4.2) (4.9) (2.8) (5.2)
Mpumalanga 4.0 15.1 10.7 (4.8) (4.7) (3.4) (5.1)
North West 3.0 14.0 9.1 (5.5) (4.2) (3.4) (5.0)

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 60.0 13.0 8.4 (5.7) (3.9) (3.5) (5.1)
Retail 57.0 13.0 8.4 (5.7) (3.9) (3.5) (5.0)
Other 3.0 13.0 9.4 (5.5) (4.3) (2.4) (5.3)
Gauteng 25.0 13.0 8.5 (5.7) (3.9) (3.6) (5.1)
KwaZulu-Natal 15.0 13.2 8.5 (5.3) (4.0) (3.2) (5.0)
Free State 5.0 12.7 7.9 (6.1) (3.6) (3.7) (5.0)
Western Cape 5.0 12.7 8.8 (5.6) (4.0) (3.3) (5.1)
Limpopo 3.0 12.7 8.1 (5.9) (3.7) (3.7) (5.0)
Eastern Cape 4.0 13.2 8.3 (5.9) (3.7) (3.7) (5.0)
North West 3.0 13.2 8.3 (5.8) (3.8) (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 33.0 14.3 9.8 (4.9) (4.4) (3.3) (5.1)
Retail 32.0 14.3 9.7 (4.9) (4.4) (3.4) (5.1)
Other 1.0 14.2 11.1 (4.7) (4.3) (2.8) (5.1)
Gauteng 10.0 14.2 9.6 (5.1) (4.1) (3.5) (5.1)
KwaZulu-Natal 4.0 14.2 9.6 (5.1) (4.1) (3.5) (5.0)
Free State 3.0 14.0 9.9 (4.9) (4.4) (3.5) (5.0)
Western Cape 3.0 14.0 9.7 (5.1) (4.3) (3.5) (5.1)
Limpopo 3.0 14.9 10.2 (4.3) (5.2) (2.9) (5.0)
Eastern Cape 3.0 14.0 9.5 (5.1) (4.3) (3.5) (5.0)
Namibia 4.0 15.2 10.3 (4.4) (4.7) (2.7) (5.1)
Mpumalanga 3.0 14.3 9.6 (5.1) (4.1) (3.5) (5.1)
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 7.0 16.9 12.9 (3.9) (5.5) (3.1) (5.2)
Retail 6.0 17.1 12.8 (3.9) (5.5) (3.0) (5.1)
Other 1.0 16.3 13.3 (3.9) (5.3) (3.2) (5.2)
Gauteng 4.0 16.3 12.3 (4.1) (5.2) (3.3) (5.1)
Limpopo 1.0 16.3 11.8 (4.1) (5.2) (3.2) (5.0)
Namibia 1.0 18.1 14.1 (3.6) (5.5) (3.1) (5.2)
Mpumalanga 1.0 17.0 13.3 (3.9) (6.1) (3.0) (5.3)
North West   19.6 15.3 (3.4) (7.0) (1.5) (5.2)

SPAIN

The tables below show the impact on the fair value of investment property, per property type, for a 25bps change in discount rate:

  30 September 2021
  Variation of discount rate
  25bps
decrease
25bps 
increase 
  €'000 €'000 
Retail 17 410 (16 980)
Land and purchase option 330 (320)
Theoretical result 17 740 (17 300)
  31 March 2021
  Variation of discount rate
  25bps
decrease
25bps 
increase 
  €'000 €'000 
Retail 17 360 (16 960)
Office 410 (410)
Land and purchase option 330 (320)
Theoretical result 18 100 (17 690)

The effect of a 25bps change to the base discount rate will have the following impact on the valuation of the portfolio:

    25bps increase 25bps decrease
Southern Africa(1) Fair value
Rm
Decreased
fair value
Rm
Decrease 
Rm 

decrease 
Increased
fair value
Rm
Increase
Rm
%
increase
30 September 2021 15 277 14 861 (416) (2.7) 15 719 442 2.9
31 March 2021 15 554 15 143 (411) (2.6) 15 991 437 2.8
Spain(2) Fair value
€m
Decreased
fair value
€m
Decrease 
Rm 

decrease 
Increased
fair value
€m
Increase
Rm
%
increase
30 September 2021 976 959 (301) (1.8) 994 309 1.8
31 March 2021 987 969 (306) (1.8) 1 005 313 1.8
(1) Fair value excludes non-controlling interest in Clidet.
(2) Fair value sensitivity analysis at 25bps increase/decrease for standing investments and c.100bps increase/decrease for land and related options.

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

  Unaudited
30 September 2021
Recurring
fair value
measurements
Level 3
Rm
Unaudited
30 September 2020
Recurring
fair value
measurements
Level 3
Rm
Audited
31 March 2021
Recurring
fair value
measurements
Level 3
Rm
Investment property 31 325 35 177 32 193
Right-of-use asset 197 217 220
  Unaudited
30 September 2021
Non-recurring
fair value
measurements
Level 3
Rm
Unaudited
30 September 2020
Non-recurring
fair value
measurements
Level 3
Rm
Audited
31 March 2021
Non-recurring
fair value
measurements
Level 3
Rm
Investment property held for sale 1 076 562
Right-of-use asset held for sale 25