RISKS, RESPONSES AND PERFORMANCE

The Chief Executive Officer together with selected Executive Committee members identified the strategic and operational risks that could inhibit Growthpoint from achieving its strategy and objectives.

STRATEGIC RISKS

Key risk identified		Response to threat or opportunity		Find out more
B-BBEE • The rating of Growthpoint has a direct impact on its ability to attract tenants, particularly those who require a landlord with a rating that will maintain or improve their own rating. This is prevalent in those sectors of the market where occupancy costs account for a meaningful proportion of expenditure, such as financial, professional and consultancy services		Growthpoint’s B-BBEE rating was analysed and given the necessary attention, resulting in an improved rating for Growthpoint. Initiatives in this regard are on-going		Page 117
Increased compliance and regulatory burden and associated costs • New and amended legislation is continually being introduced in South Africa. Such legislation is often based on similar legislation in highly developed economies where the state has created an environment which is both conducive to, and supportive of, the implementation thereof. The same cannot be said for the South African environment where such burden is often placed on the private sector. This often results in the redirection of both human and financial resources		New and amended legislation is monitored and assessed by the in-house Legal Department. The Legal Department determines the direct probable impact on the businesss, and together with the business explores mechanisms to address the related risks in an efficient and effective manner
Limited opportunities to buy quality assets that are accretive • Growthpoint, in common with other larger listed property companies, has grown its property assets in more recent years largely through acquisitions. The pool from which future meaningful acquisitions can be sourced is diminishing, resulting in yields increasing to levels which could result in such acquisitions having a dilution effect on distributions		Growthpoint is spending increasing amounts of capital and development expenditure on its own portfolio as well as providing capital to fund the expansion of both GOZ and the V&A Waterfront. The investment in GOZ is in the form of reinvestment distributions (DRIPs) and in the V&A Waterfront in the form of a loan funded from distributions due to Growthpoint		Page 69 Page 95 Page 99
Low economic growth environment exacerbated by electricity crisis • Electricity costs account for some 35% of direct property-related expenditure. The recent increases in electricity costs have been significantly higher than inflation. Although Growthpoint recovers the cost of electricity from tenants, the tenants are unable to pass such costs onto their customers. This is exacerbated in a low economic growth environment. The tenants seek to redress this imbalance by reducing direct rental costs upon expiry/renewal of leases		A number of initiatives have been undertaken to reduce electricity consumption of tenants and thereby reduce the cost of a tenant’s occupancy. Such initiatives include amongst others: • The design of new and refurbished office buildings to achieve a minimum 4-Star Green Star rating from the Green Building Council of South Africa (GBCSA) • The introduction of energy efficient light fittings; the savings derived therefrom being split equally between Growthpoint and the tenant • The rating of buildings using a tool developed by the GBCSA in order to identify poor performing buildings and implement improvements • Investment in renewable energy projects		Page 51
Making poor investment decisions • The returns from an investment may be lower than anticipated		Investments are made only after a thorough analysis has been conducted. The acquisition, development or redevelopment of a property in excess of R20 million is assessed by the Deal Forum, which comprises executive management as well as personnel having specific knowledge and experience relevant to the proposed acquisition, development or redevelopment. Furthermore, any acquisition, development or redevelopment of property in excess of the prescribed levels of authority delegated to the executive directors is appraised by the Property Committee and/or the Board		Page 69
Political instability and civil unrest • Historically, this risk has not had a direct impact on Growthpoint and, as such, the organisation has not been precluded from conducting its business nor have its assets been threatened, nor has the market value of its property assets been diminished. The risk is rather one of an indirect nature where the impact thereof translates into a lack of general business confidence resulting in an unwillingness of tenants to commit to longer-term leases		Growthpoint endeavours to secure long-term leases from tenants of national or international repute. To this end, it attempts to offer occupancy that is tailor-made for tenant specific requirements		Page 69
Reaching capacity in local debt markets • The banks in South Africa have risk models whereby limits are established at which a bank’s exposure to any one client is capped. The recent acquisition of Acucap and Sycom increased Growthpoint’s total exposure. The extent of funding available from all major South African banks could, with time, be restrictive		Locally, Growthpoint has diversified its sources of funding to include not only traditional bank debt, but also debt capital markets. More recently, it has accessed unsecured long-term funding from an institutional financier. The company continues to raise additional equity utilising the distribution reinvestment (DRIP) mechanism		Page 48

OPERATIONAL RISKS

The key operational risks identified have been assessed in terms of their probability and their impact on Growthpoint from both an inherent risk, as well as a residual risk perspective.

The inherent risk is the risk assessed prior to any response from management, whereas the residual risk reflects the potential likelihood and impact of the risk after interventions taken by management.

The inherent and residual risks have been depicted in “heat maps” below.

Heat map of inherent operational risks

Heat map of residual operational risks

Key risk identified	Probable effects of risk	Inherent risk assessment	Response to risk	Residual risk assessment	Key performance indicator and performance	Find out more
Major tenant failure	• Large vacancies that cannot readily be filled • Unable to re-let retail space due to the limited pool of national retailers • Additional costs incurred in filling vacancies • Re-letting of space which is at a lower rental than the current or market rental	Likelihood: Almost certain Impact: Severe	• Tenant creditworthiness is assessed at the inception of a lease • Sector and geographically diverse portfolio of properties	Likelihood: Moderate Impact: Severe	RSA bad debts written off less recoveries R15,1 million (FY14: R6,6 million)	Page 88
Increase in vacancies	• Reduction in net property income • Additional costs incurred in filling vacancies	Likelihood: Almost certain Impact: Severe	• Upgrading, refurbishment and enhancement of properties • Tenant incentives • Broker incentives	Likelihood: Moderate Impact: Severe	RSA vacancies • Retail: 3.3% (FY14: 4.5%) • Office: 8.0% (FY14: 8.0%) • Industrial: 5.3% (FY14: 3.0%)	Page 75 Page 82 Page 88
Increase in arrears	• Significant monies owing are irrecoverable • Increase in working capital requirements	Likelihood: Almost certain Impact: Medium	Credit risk management processes implemented and enforced	Likelihood: Moderate Impact: Medium	RSA arrears as a percentage of collectables • Retail: 10.2% (FY14: 9.3%) • Office: 5.0% (FY14: 3.5%) • Industrial: 6.5% (FY14: 3.8%)	Page 75 Page 83 Page 88
Deteriorating service delivery and infrastructure	• Loss of tenants to nodes with better service levels/ working infrastructure • The incurring of additional expenditure to retain tenants	Likelihood: Almost certain Impact: Medium	• Upgrading, refurbishment and enhancement of properties • Building sustainability initiatives	Likelihood: Moderate Impact: Low	Renewal percentage of RSA leases 65.5% (FY14: 65.7%)	Page 75 Page 82
Margin pressure on net property income	• Lower distributions	Likelihood: Prevalent Impact: High	• Annual budgets are prepared and approved • Monitoring of performance against budget per building, strategic business unit, sector and at RSA operations (excluding the V&A Waterfront) level	Likelihood: Almost certain Impact: High	RSA property expense ratio (excluding the V&A) 24.0% (FY14: 24.8%)	Page 37
New property administration and financial system implementation	• Not meeting the minimum functional requirements of the business • Non-realisation of envisaged efficiencies resulting from the introduction of new processes	Likelihood: Moderate Impact: Severe	A Steering Committee headed by the Chief Information Officer was initiated at the inception of the project and oversees all project-related activities. The Chief Information Officer reports on the project at each Executive Committee meeting	Likelihood: Moderate Impact: High	Project scorecard
Attraction and retention of skilled staff	• Operational instability and/or lack of experience resulting in poor service levels • Loss of credibility by external stakeholders	Likelihood: Almost certain Impact: High	• The Remuneration Committee fixes the remuneration packages of individual directors and members of senior management with the objective of attracting and retaining people of the required calibre • A Staff Incentive Scheme was established so as to assist in the retention of personnel	Likelihood: Moderate Impact: Medium	RSA retention of personnel Resignations (including retirements) of only 11.6% (FY14: 8.1%) of employees	Page 55 Page 58
Successful integration of Acucap and Sycom acquisition	• The loss of key Acucap and Sycom personnel • Disproportionate allocation of personnel and resources to integration activities • Slower than intended realisation of synergies	Likelihood: Almost certain Impact: High	An Acucap Steering Committee comprising all members of the Executive Committee, as well as a number of other role players, including former Acucap – now Growthpoint employees, meets on a monthly basis to share information with regard to the integration process and to discuss matters that could hinder the successful integration of the Acucap acquisition	Likelihood: Moderate Impact: Low	Property expense ratio • Retention of key Acucap personnel • Property expense ratio	Page 36 Page 104
Increased cost of debt	• Volatility in distributions • Breaching of interest covenants • Impacts the required forward yield for the acquisition of properties	Likelihood: Prevalent Impact: Severe	Utilisation of interest rate swap contracts to ensure adherence to RSA policy of maintaining a minimum rolling 12-month fixed to floating ratio on debt of 75%	Likelihood: Almost certain Impact: Severe	RSA proportion of fixed to floating borrowings 76.0% (FY14: 78.4%)	Page 50
Management capacity and succession	• Cannot readily react to opportunities that arise in the market place • Loss of credibility by external stakeholders • Operational instability and/or experience resulting in poor service levels	Likelihood: Almost certain Impact: High	The Remuneration Committee reviews the succession plan of Exco • The Executive Committee meets monthly to discuss and address operational performance and any related matters of concern • Loss of credibility by external stakeholders	Likelihood: Moderate Impact: Medium	Renewal percentage of RSA leases 65.5% (FY14: 65.7%)	Page 39
Fraud	• Lower distribution income • Reputational damage	Likelihood: Almost certain Impact: Medium	The Remuneration Committee reviews the succession plan of Exco • Growthpoint has a crime and civil liability insurance policy which addresses fraud by both employees and others, as well as civil liability to third parties • Internal Audit addresses all matters identified through the Tip-offs Anonymous Helpline	Likelihood: Moderate Impact: Low	RSA number and extent of fraud claims Nil (FY14: Nil)	Page 132