Business overview

Risks and opportunities

Effective risk governance enables us to leverage opportunities that support our strategic objectives while making risk-based decisions in choosing to pursue an opportunity.

In line with principles 11, 12, 13 and 15 of King IV, we have applied the revised ISO 31000:2018 risk management principles to establish an integrated approach in managing our risks by embedding our combined assurance processes with our enterprise risk management process.

Our risks are closely linked to our strategy and related objectives and targets, which are monitored continuously to ensure proactive responses to positive and negative movements. These indicators are directly linked to our risk appetite and tolerance levels of our strategic objectives, and cascaded down to the operational risk level. Risk management is embedded in our culture. Our view on risk appetite and risk tolerance is summarised below:

Risk appetite is the maximum risk we are willing to accept in implementing our business strategy.

Risk tolerance is the threshold variance in the level of risk mitigation (avoid, tolerate, accept) we are prepared to accept.

At a strategic level, we have analysed each risk to identify possible opportunities. The magnitude of opportunities varies from risk to risk, for example some risks represent greater opportunities. We have ranked opportunities on a three-point scale of low, medium and high.

We are continually strengthening our risk management practices to manage shareholder value and support sound business practices and growth. We summarised our top risks and responses below. We also link our top risks to our strategic matters.

Risk assurance process    
IDENTIFY AND ANALYSE
 
ASSESS
 
RESPOND
 
MONITOR
AND
MANAGE
 
Executive and line managers   First
LINE OF DEFENCE
Risk managers   Second
LINE OF DEFENCE
Internal auditors, external auditors and other independent assurance providers   Third
LINE OF DEFENCE

 

Combined assurance forum
Assurance providers are monitored through this forum.

Audit and risk committee
The board has delegated oversight of risk management to the audit and risk committee.

Board of directors
The board is ultimately responsible for risk management.
Exco, as the implementer of strategy, is responsible for systematic risk management and implementing effective risk mitigations. Our risk management process is applied equally across health, safety and environmental, fraud and regulatory compliance risks.
Our top risks are well managed and reassessed against changes in the economy, property industry and our portfolio. This enables us to assess the potential impacts of risks on the value-creation process and prioritise key and critical risks.
We respond to risk using a combined assurance approach: each risk is managed through three levels of defence.
Risks and opportunities are interrogated quarterly at the combined assurance forum, attended by exco members, senior management as well as internal and external auditors.

At forum meetings, exco reports back on the effectiveness of current risk mitigation strategies and reassess risks in light of current internal and external factors. The forum formally reports to the audit and risk committee on all potential and identified emerging risks, and mitigating actions taken within acceptable parameters.
 

BMW Group SA Regional Distribution Centre

Key risk indicators

DESCRIPTION POTENTIAL IMPACT MEASUREMENT CURRENT STATUS MITIGATING
ACTION
RESIDUAL
RISK
OPPORTUNITY RISK MOVEMENT
FY18/FY17
STRATEGIC
MATTERS
Key risk: Meeting shareholder expectation            
Not meeting distribution guidance on a long-term basis
  • Reputational damage
  • Unable to raise equity in the market
DPS We met our 2018 distribution guidance
  • Complete 210 000m2 of new developments over rolling three-year period
  • Maintain close relationships with key tenants to understand their financial situation
  • Proactive property and asset management
  • Form strategic joint venture relationships to attract new tenants to Waterfall
Medium
High
The ability to generate shareholder value will make us the premier investment choice. To meet our distribution targets, we must maintain an efficient operating model, as well as excellent relationships with our stakeholders
New
Key risk: Emerging markets            
Volatile economic conditions negatively impacting growth and revenue potential
  • Liquidity of our investments in the rest of Africa
  • Increasing operational costs
  • Unfavourable foreign currency movements
  • Ability to repatriate funds
  • Negative fair value adjustment/ impairment on the outstanding investment value
Rest of Africa retail investments Current investment spend has been curtailed
  • Further investment curtailed
  • Existing shareholders actively supporting the asset management function
High
Medium
Certain African economies are recovering off a depressed base. In addition, research shows that the retail culture in Africa is growing, making retail opportunity greater than before


Key risk: Cost and availability of water supply            
Protracted drought and deteriorating municipal infrastructure have increased strain on bulk water supply
  • Potential loss of income if tenants cannot trade due to lack of water
  • Future development roll-out impact
  • Interrupted business operations
  • Increased cost of occupancy for tenants
Water resilience Current backup plan includes storage of more than one day’s usage per building
  • Groundwater filtration implemented at Eikestad Mall
  • Other assets have backup tanks or water-shipping arrangements to maintain water resilience
  • Review service level agreements with contractors to bring additional water, and the setup of water tanks
Medium
Medium
Water supply is continually monitored for quality and availability. Our waterresilience plans ensure a reliable supply of potable water for operational continuity. This in turn ensures we maintain an outstanding customer and tenant experience, creating a competitive advantage. The South African portfolio currently has two days of water resilience, ie a property can operate normally for two days without municipal water supply


Key risk: Delivery of Waterfall development            
Developments delivered:
  • Late
  • Over budget
  • In contravention of applicable laws
All developments must adhere to generally acceptable quality standards
  • Late delivery may mean suboptimal returns due to penalties being imposed and/or loss of rentals
  • Reputational damage, loss of credibility and negative publicity from dissatisfied tenants
  • Potential for constrained cash flow arising from over budget developments (see liquidity risk below)
  • Disputed insurance claims due to contravening applicable laws, eg building approvals, in the event of unexpected damage
  • Project budget per development
  • Portfolio infrastructure budget
  • Legal and regulatory compliance
  • All developments are on track for on-time delivery
  • Cost are being managed
  • All regulatory requirements are in place
  • Detailed operational risk analysis by external third party to focus on perceived high-risk areas
  • New head of developments and head of sustainability and infrastructure appointed
  • Regular meetings between development and asset management teams
  • Passing on financial loss to contractor though legal agreements
Medium
High
We are uniquely positioned as a REIT with a substantial development pipeline. This allows us to respond to market requirements and construct the optimal mix between commercial, industrial and residential developments while contributing to our DPS targets


Key risk: Legal and regulatory compliance            
Non-compliance with all legal and regulatory requirements
  • Reputational harm
  • Reportable irregularities
  • Penalties, sanctions and fines
  • Business disruption
Contravening minimum legislative requirements identified through regulatory compliance reviews or reported incidents
  • No contravention detected
  • Legal and regulatory compliant
  • Internal legal team comprising four staff members
  • Quarterly reporting through combined assurance forum, audit and risk and transformation, social and ethics committee meetings
  • Implementing technological tool (Sentinel Law Explorer) to continually monitor changes to existing legislation
Low
Low
Key to our business is maintaining strong relationships with regulators and local authorities to ensure we meet our regulatory commitments and receive relevant regulatory approvals timeously to deliver our developments on time. Sentinel tool will assist in keeping abreast of regulatory requirements and enhance our ability to respond to changes.

Key risk: B-BBEE score            
A weakening B-BBEE rating
  • Potential sanctions by regulatory authorities
  • Failure to secure new tenants/ retain tenants that rely on the B-BBEE scorecards of their landlords
B-BBEE rating Level 2
  • Proactively monitoring procurement spend
  • Proactively monitoring scorecard pillars
  • Appropriate budget and resources allocated to achieving points for each pillar
High
High
  • We are currently level 2 B-BBEE compliant, which is exceptional among our REIT peers and gives us a competitive edge
  • We proactively engage with interested vendors who want to participate in the roll-out of the Waterfall precinct and provide businesses with real growth opportunities

Key risk: Cost and availability of electricity            
Inability of electricity providers to provide a dependable electricity supply at the required quality and reasonable cost. This includes available bulk supply for future developments
  • Increased infrastructure cost passed on to tenants for back-up power solutions
  • Failure to secure approval for new developments
  • Increased cost of occupancy for tenants<
Uninterrupted electricity supply Uninterrupted electricity supply
  • Backup generators installed
  • Robust maintenance plan for generators
Medium
High
  • Investments made to ensure minimal downtime, regardless of reliability at source
  • Being able to trade without service interruptions gives our portfolio a competitive edge


Key risk: Liquidity            
Not having enough cash resources to
meet obligations
  • Maintaining debt covenants, including loan-to-value and interest cover ratio
  • Ability to pay distributions
  • Insufficient cash to meet equity contribution for developments
  • Delayed development roll out of Waterfall
Cash availability R1.2 billion cash.
R290.0 million committed working capital facilities
  • Working capital facilities secured with two banks
  • Cash buffer established
Medium
Medium
  • Our cash buffer gives us the ability to respond to new developments

Key risk: Fibre reliability            
Unreliability of central backbone fibre infrastructure provided by a stakeholder
  • Loss of connectivity, with potential to reduce business productivity for Waterfall tenants
  • Reputational damage to the Waterfall brand, as well as retention risk for Waterfall tenants
  • Potential financial loss
Monitoring network uptime 99.0%
  • Established a centralised coordinated network operating centre
  • Monthly meetings with stakeholder to monitor uptime and network availability statistics
Medium
High
  • A singular co-ordinated precinct approach to fibre roll-out resulted in substantially lower execution costs and economies of scale for both the fibre provider and as the physical infrastructure provider
  • Quality of service monitored at a centralised control room


Key risk: Land invasion            
Land invasion
  • Delayed developments due to inability to remove illegal land occupiers
  • Decreased land valuations
  • Potential loss of income
  • Additional operating cost to manage potential land invasion
Operational response
(<24 hours)
Operational control
  • Boundary demarcation
  • Court order obtained to evict trespassers
  • Regular proactive patrols
  • We rely on our strong relationship with council for their support
  • Operational control over our assets
Medium
Low
  • We face similar challenges to what is happening in the rest of the country
  • The emergence of this risk has increased the working relationships with stakeholders such as the police and municipalities
New


Key risk: Stakeholder activism            
Increased community activism and pressure on business to provide more support local suppliers and service providers
  • Delayed developments
  • Reputational damage
  • Threats and intimidation of staff
Delays on developments due to community activism No delays on developments due to community activism
  • Actively engaging with parties proposing marches
  • Co-ordinated actions with authorities, joint venture partners and parties proposing marches to engage and prevent these events
  • Procurement policy to include using local suppliers
Medium
Medium
  • Increased activism is evident nationally This gave us the opportunity to engage with similarly affected stakeholders, possibly leading to joint opportunities such as uplifting the community
New