Securities

Mortgage bonds have been registered over South African investment property, including investment property reclassified as held for sale, with a fair value of R43 253 million (FY14: R26 382 million) as security for non-current interest-bearing liabilities at a nominal value amounting to R20 703 million (FY14: R11 457 million).

First mortgage bonds have been registered over Australian investment property, including investment property reclassified as held for sale, with a fair value of AUD2 283 million or R21 442 million (FY14: AUD2 037 million or R20 297 million). Additional security was also provided in the form of other current assets to a value of AUD124 million or R1 170 million (FY14: AUD92 million or R913 million).

Valuation of investment properties

In terms of the Group’s accounting policy, at least 75% of fair value of investment properties should be determined by external, independent property valuers, having appropriate recognised professional qualifications and recent experience in the location and category of the property being valued.

The balance of the South African portfolio was valued by Growthpoint’s qualified internal valuers.

The South African properties were valued at 30 June 2015 using the discounted cash flow of future income streams method by the following valuers who are all registered valuers in terms of section 19 of the Property Valuers Professional Act, No 47 of 2000:

The Australian properties were valued at 30 June 2015 using the discounted cash flow of future income streams method by Savills, Jones Lang LaSalle, Urbis, Knight Frank, CBRE and LandMark White who are all members of the Australian Property Institute and Certified Practising Valuers.

South African portfolio

Commentary on discount rates

The discount rate applied was derived using an appropriate capitalisation rate and adding a growth rate based on market-related rentals, testing this for reasonableness by comparing the resultant Rand rate per m² against comparative sales of similar properties in similar locations.

Commentary on capitalisation rates

Investor interest in properties across all sectors remains robust with competition having increased for the small amount of prime stock that does come onto the market. As a result of this, yields have firmed in general, especially in the prime market. Average capitalisation rates and discount rates have compressed over the year to take this trend into account.

Commentary on expected vacancy periods and rental growth rates

Historic trends with regard to vacancy periods experienced on the re-letting of vacant space, coupled with the emphasis on tenant retention, indicate that the expected vacancy period applied in the 2015 valuation best approximates the actual experience. With inherent in-force rental increases at above 7.7% per annum (FY14: 8%) and expense growth stabilised, the expected rental growth rate for the 2015 valuations is considered reasonable.

Commentary on Acucap and Sycom portfolio

Mills Fitchet Magnus Penny (Cape) and Quadrant Properties valued the Acucap and Sycom properties at 31 March 2015 using methods that were consistent with Growthpoint’s valuation method. The relevant people and qualifications are included in the listing above. Values established at 31 March 2015 were used as the values of the properties at 30 June 2015.

As the above table shows, over the 12 months to 30 June 2015 discount rates utilised in the valuation of the GOZ property portfolio have tightened (lowered) although the spread has remained mostly static. At the reporting date, the weighted average discount rate utilised in valuing the GOZ portfolio of property has decreased by approximately 65 basis points. Over this same period the implied property risk premium has reduced by approximately 11 basis points. The implied property risk premium is the difference between the weighted average discount rate and the 10-year Australian Government bond rate. The decrease in the implied property risk premium is driven by the tightening of the GOZ weighted average discount rate, which outweighed the reduction in the bond rate of 54 basis points from June 2014 following a recovery from the low levels in March 2015.

Commentary on capitalisation rates

Industrial

There continues to be strong interest in the industrial property sector, as transactions indicate domestic and foreign institutional investors compete for limited prime quality stock and secondary quality stock. This has led to further firming of yields over the past 12 months of 50 to 100 basis points for both ends of the prime yield range and the higher quality end of secondary yields. These transactions have provided good evidence for the Group’s own industrial properties which reduced the weighted average capitalisation rate used to value the industrial portfolio from 8.0% to 7.3% over the year to 30 June 2015.

Office

Over the past two to three years, the commercial property market has experienced solid investment activity from both domestic and international institutional investors, predominantly for A-grade office assets, which has led to firmer yields. However, in contrast to the buoyant investment metrics, office leasing conditions remain challenging. Following some new leasing deals, lease extensions to existing tenants and a strong investment market, the weighted average capitalisation rate used in valuing the office portfolio has firmed from 7.8% to 7.3% over the year to 30 June 2015.

The investment property reclassified as property held for sale are properties that the directors have decided will be recovered through sale rather than through use. The opening balance relates to two investment properties in the retail sector, three investment properties in the office sector and three investment properties in the industrial sector. In the current year, seven of the investment properties were disposed of for R157 million and one was transferred back into investment properties as the sale was cancelled.

Sale agreements have been entered into for a further five properties, two in the office sector and three in the industrial sector, with a fair value of R539 million at year end.