INVESTMENT PROPERTIES

The group rents out hotel properties.

The group’s investment properties have been categorised as level 3 values based on the inputs to the valuation technique used. The group has elected to measure investment properties at fair value. The fair value is determined by using the discounted cash flow method by discounting the rental income (based on expected net cash flows of the underlying hotels) after considering the capital expenditure requirements. The expected cash flows are discounted using an appropriate discount rate. The core discount rate is calculated using the South African bond yield 10Y at the time of valuation, to which premiums are added for market risk and equity and debt costs. The discount rate takes into account a risk premium associated with the local economy as well as that specific to the local property market and the hotel industry. At 31 March 2020, the group’s investment properties were independently valued by professionally qualified valuers having recent experience in the location and category of the group’s investment property being valued. The valuation is currently performed on an annual basis on the entire portfolio of investment properties by an independent valuator.

The impact of COVID-19 and the associated impact on the hospitality industry has had a significant impact on the fair value of hotels at 31 March 2020. Due to the uncertainty of future trading conditions, the forecasts reduced in year one by 75% and in year two by 25% when compared to actuals as at 31 March 2020. The South African bond yield 10Y increased by 1.9 percentage points from 31 March 2019 (8.61%) to 31 March 2020 (10.51%). The group had used a risk-free rate of 8.65% in 2019, compared to 10.50% in 2020, resulting in higher exit yields and higher discount rates across the portfolio.

As at 31 March 2020 the significant unobservable inputs were as follows:

• A weighted average rental growth rate of 5.19% (2019: 5.25%);
• A terminal capitalisation rate of 9.00% to 13.50% (only five properties exceed 11.00%) (2019: 7.25% to 7.75%); and
• A risk-adjusted discount rate of 12.00% to 14.50% (only one property is lower than 13.00%) (2019: 12.50% to 13.00%).

The table below indicates the sensitivities of the aggregate investment property portfolio by increasing or decreasing value inputs as follows:

The investment properties are leased to tenants under operating leases with rentals payable monthly. Rental income is based on fixed, fixed and variable and variable lease agreements concluded with tenants. The majority of the leases are fixed and variable with the fixed rental amounts resetting after a number of years. In the long term, fixed rentals should always exceed variable rental income received.

Amounts recognised in profit or loss for investment properties:

At the balance sheet date the group had contracted with tenants for the following future minimum lease payments under non-cancellable operating leases for investment property. The rentals below relate only to fixed rentals and do not include any variable rentals: