Measuring our success

Transcription

1 Measuring our success INTEGRATED ANNUAL REPORT 2011

2 With an annual compound return of 26.75%, Vukile has been ranked in the top two South African property shares on the JSE over a fi ve year period. This is a clear measure of the success of its strategy of investing in properties with strong contractual cash fl ows for long-term sustainability, capital appreciation and growing income distributions for linked unitholders. OVERVIEW 01 Company highlights 01 Corporate profi le 01 Salient features of the results 02 Property portfolio 04 Integrated reporting 08 Chairman s report 11 Market overview 12 Board of directors 14 Group structure The executive committee REPORT TO STAKEHOLDERS 16 Report to fi nancial stakeholders 30 Report to commercial stakeholders 36 Report to the community GOVERNANCE AND REMUNERATION REPORT 42 Corporate governance report 47 Remuneration report ANNUAL FINANCIAL STATEMENTS 52 Directors responsibility statement 52 Declaration by the company secretary 53 Report of the independent auditors 54 Directors report 58 Report of the audit and risk committee 60 Statements of fi nancial position 61 Income statements 62 Statements of comprehensive income 63 Distribution statements 64 Statements of changes in equity 65 Statements of cash fl ow 66 Notes to the annual fi nancial statements 108 Unitholders analysis UNITHOLDERS INFORMATION 110 Notice of annual general meeting 113 Summarised annual fi nancial statements 117 Form of proxy 118 Notes to the form of proxy 119 Corporate information 119 Unitholders diary JSE code VKE NSX code VKN First Floor, Meersig Building, Constantia Boulevard, Constantia Kloof, 1709 PO Box 5995, Weltevreden Park,

3 Measuring our success GROUP HIGHLIGHTS Vukile achieves five-year BEE equity target from R439 million investment by BEEShareCo (Lazarus Capital (Pty) Ltd) JSE CODE: VKE 24 June - Listed on the JSE Limited Acquisition of 75% of MICC NSX CODE: VKN 11 July - listed on the Namibian Stock Exchange PROPERTY ACQUISITIONS/UPGRADES Balance of acquisition of MICC grows gross assets PHOENIX PLAZA, KWAZULU-NATAL OAKHURST, PARKTOWN, GAUTENG NO 50, SIXTH ROAD, HYDE PARK, GAUTENG R80 million expansion and upgrading project launched for Phoenix Plaza and Dobsonville Shopping Centres R34.4 million acquisition of the Oakhurst office building in Parktown Acquisition of 50, 6th Road, Hyde Park in Sandton for R57 million SHARE PRICE AND PORTFOLIO GROWTH SHARE PRICE cents June

4 As Vukile s record shows, we have advanced rapidly but steadily, step by carefully calculated step. At the same time, we have demonstrated that we do not stand back from a challenge nor are we content to just mark time. Vukile is a driven business: driven to create value and driven to generate returns Property portfolio consists of 74 properties with a gross lettable area of m 2 Rated the best performing property loan stock company listed on the JSE Limited in 2009 by Catalyst Fund Managers Acquisition by Vukile of the property asset management business of Sanlam Properties Responsible for rendering property asset management services to Sanlam Life s entire commercial property portfolio WEST STREET, HOUGHTON, GAUTENG Acquisition of offi ce complex in West Street in Houghton, Johannesburg, for outlay of R33.9 million Expanded Namibian portfolio through the acquisition of BPI House in Windhoek for about R113 million Successful completion of Moratiwa Crossing shopping centre and Allandale mini-factory and warehousing developments, on time and below budget BPI HOUSE, WINDHOEK Successful completion of expansions at Oshakati Shopping Centre, Nelspruit Truworths and Hellman International, on time and below budget Option to acquire a R500 million property portfolio from Sanlam and a right of fi rst refusal on the remainder of the Sanlam property portfolio Acquisition of nine properties for R541 million: Amanzimtoti Jeffels Road Warehouse Kimberley Kim Park Nelspruit Sanlam Centre Pinetown Westmead Kyalami Park Pretoria Hatfi eld Sanlam Building Pretoria Sanwood Park Rustenburg Edgars Building Sandton St Andrews Complex Sandton Sunninghill Place PROPERTY VALUE billion rand 6 31 March Property portfolio (billion rand) Share price at year end March

5 Company highlights Annual distribution increased by 9% Successful acquisition of R541 million property portfolio Vacancies contained at 5.1% of gross rentals (2010: 4.1%) Successful re-fi nancing of R462 million securitisation debt Ranked second best performing property company listed on the JSE in 2010, after being ranked fi rst in 2009 by Catalyst Fund Managers (Pty) Ltd Ranked 27th of Top 100 Listed Companies in 2010 by the Business Times Further improvement in recurring cost to property revenue ratios Corporate profi le Vukile is a property loan stock company which was listed on the JSE Limited on 24 June 2004 (JSE code: VKE) and on the Namibian Stock Exchange on 11 July 2007 (NSX code: VKN). Its listing was promoted by Sanlam, which contributed a signifi cant share of Vukile s start-up portfolio. Vukile s market capitalisation was approximately R4.99 billion at 31 March 2011 and its property portfolio was valued at R5.35 billion at year end. There were Vukile linked units in issue. SALIENT FEATURES OF THE RESULTS Cents per Cents per Audited year ended 31 March R000 linked unit R000 linked unit Profi t for the year before debenture interest Headline earnings attributable to linked unitholders Net Asset Value (NAV) * * Adjusted to account for additional linked units issued in September 2010 to 932 cents per linked unit. 01

6 Property portfolio Retail, offi ces and industrial ANGOLA ZAMBIA Omusati Ohangwena 7 Oshikoto Oshana Kavango Caprivi Kunene Top 10 properties Other properties Otjozondjupa Erongo Omaheke Khomas BOTSWANA NAMIBIA Hardap Karas 8 DAVEYTON SHOPPING CENTRE Daveyton Rentable area: m 2 Valuation per m 2 : R ROODEPOORT HILLFOX POWER CENTRE Roodepoort Rentable area: m 2 Valuation per m 2 : R ARIVIA.KOM BUILDING Midrand Rentable area: m 2 Valuation per m 2 : R9 406 Northern Cape SOUTH AFRICA Western Cape 2 OFFICES Building Region Town Arivia.kom Building Gauteng Midrand DLV Building Gauteng Pretoria Barlow Place Gauteng Sandton Mutual and Federal Gauteng Pretoria Pinepark Western Cape Cape Town Eva Park Gauteng Johannesburg Louis Leipoldt Hospital Western Cape Bellville Nelspruit Prorom Mpumalanga Nelspruit Bedfordview GIS Gauteng Johannesburg 259 West Street Gauteng Centurion East London Sanlam Park Eastern Cape East London Durban Embassy KwaZulu-Natal Durban Oakhurst Parktown Gauteng Johannesburg 50 6th Road Hyde Park Gauteng Sandton Waymark Offi ces Gauteng Centurion West Street Houghton Gauteng Houghton Pretoria Hatfi eld Sanlam Building Gauteng Pretoria Pretoria Sanwood Park Gauteng Pretoria OFFICES (continued) Building Region Town Sandton St Andrews Complex Gauteng Sandton Sandton Sunninghill Place Gauteng Sandton Randburg Triangle Gauteng Randburg De Tijger Offi ce Park Western Cape Cape Town INDUSTRIAL Sony Building Gauteng Midrand Supra Hino Gauteng Johannesburg Hellman International Gauteng Johannesburg Valley View Industrial Park KwaZulu-Natal Durban Village Main Industrial Park Gauteng Johannesburg John Griffi n Gauteng Johannesburg AAD Western Cape Cape Town Richmond Park KwaZulu-Natal Durban Centurion N1 Gauteng Centurion Midrand Allandale undeveloped land Gauteng Midrand Midrand Sanitary City Gauteng Midrand Parow Industrial Park Western Cape Cape Town 02

7 1 DURBAN PHOENIX PLAZA Durban Rentable area: m 2 Valuation per m 2 : R BELLVILLE LOUIS LEIPOLDT Bellville Rentable area: m 2 Valuation per m 2 : R RANDBURG SQUARE ZIMBABWE Randburg Rentable area: m 2 Valuation per m 2 : R4 074 MOZAMBIQUE Limpopo Province North West Gauteng Mpumalanga 4 DOBSONVILLE SHOPPING CENTRE Free State LESOTHO KwaZulu-Natal Soweto Rentable area: m 2 Valuation per m 2 : R PINE CREST (50%) Pinetown Rentable area: m 2 Valuation per m 2 : R9 364 Eastern Cape 6 DURBAN EMBASSY Durban Rentable area: m 2 Valuation per m 2 : R OSHAKATI SHOPPING CENTRE Oshakati Rentable area: m 2 Valuation per m 2 : R7 161 INDUSTRIAL (continued) Building Region Town Midrand Allandale Park Gauteng Midrand Germiston R24 Gauteng Germiston Randburg Trevallyn Gauteng Randburg Pinetown Westmead Kyalami Park KwaZulu-Natal Pinetown Randburg Tungsten Gauteng Randburg Robertville Mini Factories Gauteng Johannesburg RETAIL Truworths Centre Mpumalanga Nelspruit Grosvenor Shopping Centre Gauteng Johannesburg Pine Crest Centre KwaZulu-Natal Durban Lichtenburg Sanlam Centre North West Lichtenburg Barlows Audi Western Cape Cape Town Bloemfontein Plaza and Parkade Free State Bloemfontein Daveyton Shopping Centre Gauteng Johannesburg Dobsonville Shopping Centre Gauteng Johannesburg Durban Phoenix Plaza KwaZulu-Natal Durban Randburg Square Gauteng Randburg RETAIL (continued) Building Region Town Moratiwa Crossing Limpopo Jane Furse Kimberley Kim Park Northern Cape Kimberley Nelspruit Sanlam Centre Mpumalanga Nelspruit Rustenburg Edgars Building North West Rustenburg Roodepoort Hillfox Power Centre Gauteng Roodepoort Mala Plaza Limpopo Malamulele Masingita Spar Centre Limpopo Giyani Piet Retief Shopping Centre Mpumalanga Piet Retief Qualbert Centre KwaZulu-Natal Durban Kokstad Game Centre KwaZulu-Natal Kokstad The Victoria Centre KwaZulu-Natal Pietermaritzburg Meadowdale Land Gauteng Johannesburg Meadowdale Mall Gauteng Johannesburg Oshakati Shopping Centre Namibia Oshakati Oshikango Ellerines Centre Namibia Oshikango Ondangwa Shoprite Checkers Namibia Ondangwa Katatura Checkers Centre Namibia Katatura BPI House Namibia Windhoek 03

8 Integrated reporting Vukile Property Fund Limited and its subsidiaries ( the group or Vukile ) hereby present the group s fi rst integrated annual report ( integrated report ) aimed towards meeting the principles of the King Code of Governance Principles for South Africa 2009 ( King III ), which was published in 2009 by the Institute of Directors of Southern Africa, and is applicable to all listed companies with fi nancial years ending 28 February 2011 or later. One of the main differences between King III and the previous King Reports is the requirement for integrated reporting, whereby the operational, fi nancial and sustainability (environmental, social and governance) issues are discussed in relation to the key drivers of the business. In this report, therefore, we explain how the executives of the group have considered these issues while developing the business s strategy during the fi nancial year ended 31 March King III was adopted by the JSE Limited as from 1 March 2010 as a listing requirement, with an apply or explain approach. Vukile s approach to the integrated report is in line with the following comment made by the King III committee chairman Mr Mervyn King: Integrated reporting is a journey. Organisations are unlikely to achieve perfection in the fi rst year. Compliance with any particular code for the integrated report is therefore not an objective for the group at this stage compliance with International Financial Reporting Standards ( IFRS ) on the fi nancial statements is the only standard which we have applied to this integrated report. Future reports will provide further detail and data on our material issues once data-gathering systems are implemented and stakeholderengagement processes formalised. There are areas where Vukile can improve its reporting and we are committed to addressing these areas in subsequent editions of our integrated report. In particular, formal data-gathering systems for sustainability data must still be implemented. Nonetheless, we believe that this integrated report is a credible fi rst step on the journey towards best practice, and provides stakeholders with a balanced view of our activities for the year. REPORTING FRAMEWORK FOR 2011 The Vukile board of directors ( the board ) has recognised that our integrated report is the most suitable vehicle to describe our business model and the quality of decisions that have led to our fi nancial results. Vukile s business comprises two main aspects and, in the table alongside, we detail how our sustainability and fi nancial objectives inter-relate. The scope and boundaries for this integrated report were determined by considering: The infl uence and control available to the group in its business activities, and the fact that our decisions in terms of winnowing strategies, choice of suppliers and relationship with communities and tenants determine whether our success will be sustainable. The material* issues relevant to our various stakeholders (refer to the stakeholder table alongside). * Material refers to the importance of the information required by each stakeholder to make informed decisions about doing business/interacting with the group. 04

9 INTEGRATED OBJECTIVES Business activity Management approach Sustainability and financial objectives Reporting scope and boundary Property fund A listed property fund that owns and manages its own portfolio of offi ce, retail and industrial properties. Internal asset management. Outsourced property management. Building and preserving an investment property portfolio with strong contractual cash fl ows for long-term sustainability, capital appreciation and growing income distributions for linked unitholders. Building partnerships with suppliers, tenants, capital providers and our communities. Portfolio analysis, valuations, winnowing strategy, fi nancial engineering in accordance with board mandate. Directing our property managers in respect of tenant matters, supplier selection and community involvement. Property asset manager An asset manager providing asset management services to Sanlam Life Insurance Limited ( Sanlam ), in respect of their investment property portfolio. Internal asset management. Outsourced property management. Maintaining strong performance through excellent service delivery to ensure the sustainability of the revenue stream. Employing winnowing strategies to enhance Sanlam s portfolio. Building partnerships with suppliers, tenants and our communities. Portfolio analysis, valuations, winnowing strategy in accordance with the Sanlam mandate. Directing our property managers in respect of tenant matters, supplier selection and community involvement. STAKEHOLDER ANALYSIS Vukile is accountable to its stakeholders and through this integrated report the group aims to provide each of these stakeholders with the essential information required to sustain their partnerships with us. We have designed this report according to the three broad groupings of stakeholders, as indicated in the table below: KEY STAKEHOLDERS Stakeholder Relationship Material issue Report reference Financial stakeholders Institutional, individual and corporate investors. Linked unitholders. Distribution growth. Linked unit price appreciation. Liquidity. Quality of management. Report to fi nancial stakeholders. Commercial and investment banks; debt capital market investors. Financiers. Ability to service debt. Ability to refi nance maturing facilities. Adherence to fi nancial covenants. Report to fi nancial stakeholders. 05

10 Integrated reporting (continued) KEY STAKEHOLDERS (continued) Stakeholder Relationship Material issue Report reference Commercial stakeholders Property asset management client. Customer. Service delivery levels. Winnowing strategy. Report to commercial stakeholders. Occupiers of retail, offi ce and industrial space. Tenants. Terms and conditions of lease agreement. Safe and secure environment. Complementary mix of tenants. Compliance with OHS Act, Building Act and other regulations. BEE rating (specifi cally for government leases). Report to commercial stakeholders. Property management companies. Suppliers. Compliance with management agreements. Application of procurement and other policies. Service delivery. Management of tenant complaints. Timeous payment of fees. Report to commercial stakeholders. Community stakeholders Security, cleaning, construction, development and professional service providers etc. Suppliers. Procurement criteria. Localisation. Quality and price. Timeous payment of fees. Report to the community. Surrounding communities and the general public. Neighbours to our properties. Customers of our tenants. Corporate Social Responsibility ( CSR ) programmes. BEE and transformation. Facilitating the collection of social grants (refer story of Moratiwa pages 39 to 40). Report to the community. 06

11 In addition to the stakeholders mentioned before, the group also considers Government and the group s employees (refer to the Report of fi nancial stakeholders and Remuneration report) to be important stakeholders. FUTURE PLANS TO INTEGRATE SUSTAINABILITY INTO THE GROUP S BUSINESS STRATEGY Our focus areas in respect of future sustainability reporting and the integration of sustainability into our business strategy, include: Formalising a framework to ensure that sustainability is considered during strategy formulation and embedded in our operations. Implementation of environmental and social monitoring systems for key properties. These will include energy, water and waste management monitoring as well as formal tenant surveys. Enhancing our staff demographics with respect to employment equity. Formalising a cohesive Black Economic Empowerment ( BEE ) plan to address all the relevant BEE target areas. Progress on all of the above will be reported in our integrated report for the fi nancial year ending 31 March STRATEGY, OBJECTIVES AND VALUES STRATEGY Vukile s strategy is to build and preserve an investment portfolio of properties with strong contractual cash fl ows for long-term sustainability, capital appreciation and growing income distributions for linked unitholders. Our strategy is achieved through the implementation of the following key objectives: Balancing our sector and geographical portfolio profi le, to ensure sustainability throughout the real estate cycle. Continually maintaining and periodically improving our portfolio through planned maintenance and specifi c refurbishments and redevelopments. Capitalising on our partnership with Sanlam by acquiring quality investment properties through our right of fi rst refusal. Managing our fi nancial risk through conservative gearing, sound credit management policies and limiting interest rate risk through hedging. Utilising the skills and expertise of our employees and service providers to achieve operational effi ciency. Balancing the interests of all our stakeholders. VALUES While pursuing the group s strategy and objectives, we pride ourselves on the fact that we continuously act according to our values. Our core values are: Our people drive our performance. We take ownership. We value our stakeholders. We build and nurture lasting partnerships. We operate with integrity. 07

12 ANTON BOTHA Chairman s report The theme for this year s integrated report, the company s fi rst in accordance with the requirements of King III and the new Companies Act, is Measuring our Success, which is a celebration of our success in pursuing our strategy of investing in properties with strong contractual cash fl ows and growing income distributions for linked unitholders. As Vukile s record shows, we have advanced rapidly but steadily, step by carefully calculated step. At the same time, we have demonstrated that we do not stand back from a challenge nor are we content to just mark time. Vukile is a driven business: driven to create value and driven to generate returns. This integrated report details how far that drive has brought us to date, and where we are going from here. Vukile s excellent track record is best demonstrated by the following key facts: Vukile was rated by Catalyst Fund Managers as the best performing property company on the JSE for the 2009 calendar year. The following year, we almost repeated that performance (from the high base of the previous year), and were rated by Catalyst Fund Managers as the second best performing property company on the JSE for the 2010 calendar year. Vukile was ranked 27th in the Business Times Top 100 Companies, published on 7 November 2010, with a compound return of 26.75% per annum over fi ve years (this performance was rivalled by only one other company from the Property Loan Stock sector). 08

13 AUGUST 2010 SEPTEMBER 2010 NOVEMBER 2010 Unitholders approved the acquisition of nine properties for R541 million Distribution to linked unitholders grows by 9% in challenging market Vukile successfully refinanced R462 million through securitisation debt In the face of volatile international markets, muted global growth and a continued fall-out from the global fi nancial woes caused by the sub-prime crisis, the South African listed property sector delivered a robust performance during the 2010 calendar year as illustrated by the fact that the South African Listed Property Index reached a record high of in October last year. This was attributed mainly to strong demand from both institutional and retail investors. The demand for listed property investments, as well as the listing of a few smaller funds, caused the market capitalisation of the sector to grow over the last year from R100 billion to R125 billion. It is therefore not surprising to note that, according to Catalyst Fund Managers, listed property with a total return of 29.6% was the best performing of the four traditional asset classes in South Africa over the 2010 calendar year, beating equities (19.0%), bonds (14.96%) and cash (6.9%). Although the listed sector performed admirably, conditions at the coalface remained tough. Vacancies were still high and bad debts and arrears have not started to improve from previous levels. This, coupled with the fact that retail sales have remained depressed while energy costs and rates and taxes have increased signifi cantly, has caused rental levels to remain under pressure and business conditions were as challenging as at any time during the past two to three years. It is therefore extremely gratifying to report that, despite these diffi cult trading conditions, the review period has, once again, been a very good one for the company. The distribution to linked unitholders for the 12 months increased by 9% and the net asset value grew by 7.6%. In addition to these robust results, there were many highlights during the year, chief among which were: The successful bedding down of the asset management business of the Sanlam property portfolio which was acquired from Sanlam Properties in January last year. The acquisition of nine properties from Sanlam Life for R541 million, which not only enhanced the quality of Vukile s property portfolio, but also increased the value of its assets to just over R5.4 billion. The successful refi nancing of R462 million securitisation debt at a very favourable overall cost of fi nance of 9.76%, which is 0.44% lower than the previous level. The acquisition of the 9 443m² Giyani Plaza in Limpopo for R71.9 million after the year end. The acquisition of this property, anchored by a 1 804m² Pick n Pay store, is in line with our strategy of investing in properties with strong contractual cash fl ows in selected lower income areas. The initial yield is expected to be 10.2%. The containment of our vacancies at 5.1% of gross rentals. This is higher than the 4.1% vacancy fi gure at 31 March 2010 but compares well with the vacancy level of 5.3% at 30 September We are of the opinion that the outlook for property, given that the economy has experienced several successive quarters of growth, is more positive than negative. Consumer spending remains weak, however, and, as the property cycle lags the general economy by 12 to 18 months, we consider any possible recovery over the next 12 months may be muted and fairly fragile. Higher municipal rates and electricity tariffs remain a cause for concern and this will continue to make rental bargaining diffi cult and keep vacancy levels under pressure. We are also concerned about the impact of the new Consumer Protection Act on lease agreements. The Act includes, inter alia, a section which grants tenants 20 working days to arbitrarily cancel lease agreements. It also limits lease agreements to a maximum of two years, after which the lease would continue on a month-to-month basis unless a new one is signed. Both these issues could have serious consequences for the industry and we are currently consulting our advisors about the impact of the Act on our operations. 09

14 Chairman s report (continued) In addition, the South African Property Owners Association (SAPOA) is seeking to obtain clarity on some of the provisions of the Act from the Department of Trade and Industry. The impact of the King III report on corporate governance and the new Companies Act will also have a considerable effect on statutory reporting and the manner in which board and sub-committees are constituted and how they function. Further details of how we are progressing in meeting these new statutory obligations are provided in the Directors report and the report on corporate governance elsewhere in this integrated report. Earlier this year, we announced to linked unitholders that we had elected not to continue with the call option to acquire further properties from Sanlam Life, valued at approximately R500 million. This was done after it became apparent that we were not going to reach agreement on the values of these properties and we decided that, given the asking price, the proposed acquisition did not meet our stringent risk/reward criteria. Although the option has now lapsed, Vukile still has a right of fi rst refusal over the whole of the Sanlam commercial property portfolio, including the option properties. This development, however, does not mean that Vukile s appetite for acquisitions has been diminished and we are actively seeking new ways of enhancing the desirability of our property portfolio through the addition of good quality new properties as well as the expansion and renovation of our existing properties. Our primary focus area in this regard is retail centres in selected lower income areas. This component of our portfolio has been particularly resilient and successful during the past couple of years and we intend to increase our exposure to this segment of the market. We will also continue our rigorous pursuit of cost control, tenant retention, credit control and energy savings. the fi nancial services environment, spanning investment banking, private equity, retail banking, insurance and asset management. For the past nine years, he has been a director of Standard Bank, most recently as the head of the Insurance and Asset Management division and, prior to that, was in charge of the Strategic Investments and Alliances division. Gerhard was Vukile s fi rst CEO and over the past seven years, he has led the company with distinction and was instrumental in growing Vukile s assets from R1.8 billion to R5.4 billion. During his tenure, the company provided a total return to unitholders of close to 28% per annum. The board would like to thank Gerhard for his dedication, care and commitment to Vukile throughout his term in offi ce, and especially for the past year when he agreed to remain through the extended period that it has taken to fi nd his successor. He leaves Vukile in excellent condition and with a very sound base for his successor to build on. We wish him well in the career and life choices he will make after leaving Vukile. I would also like to take this opportunity of thanking my fellow board members. Their enormous experience in the property sector as well as their astute insight and innovative thinking give context and clear direction to our strategic deliberation. In addition, I would like to thank Vukile s management team and staff for their astute and effective management of the company and its property portfolio, as well as our property managers, namely JHI, Kuper Legh Property Management, Hermans and Roman Property Solutions and Old Mutual Property Group, for managing Vukile s properties as well as they have. Finally, I would like to thank our other business partners and advisors as well as our funders, our tenants, our major client, Sanlam, and our linked unitholders for their continued support. Taking into account all the factors discussed above, the board is of the opinion that Vukile will again be able to deliver reasonable growth in distributions for the coming year. During the course of the year, Gerhard van Zyl gave notice of his resignation from the company and the board of Vukile Property Fund. On receipt of his resignation, the board initiated a process to fi nd a successor for Gerhard and, following the successful conclusion of this process, Laurence Rapp has been appointed as the new CEO effective from 1 August Laurence has extensive experience in Anton Botha Chairman Roodepoort 23 May

15 Market overview Property fundamentals weakened over the past two years with higher arrear rentals, bad debts and increasing vacancies. Hardest hit in terms of vacancies was the offi ce sector which recorded a vacancy fi gure of 9.9% in December 2010, followed by the industrial sector with vacancies of around 8% and the retail sector with vacancies around 4%. Offi ce rentals remained fl at due to landlord concessions to retain current tenants or to attract new tenants. In spite of the generally weak trading conditions, the SA listed property sector recorded a total return of 29.6% for the 2010 calendar year, outperforming the other traditional asset classes over the short and longer investment time horizon. Asset Annualclass (%) ised SA listed property (4.5) Equities** Cash*** Bonds* (1.0) Source: I-Net Bridge, BESA all bond index*, All share index**, STEFI 12 month cash index***, Catalyst Fund Managers. The strong performance during 2010 was supported by a good performance of the capital markets and fi rming long bond yields. At 31 December 2010, the historic rolled income yield for SA listed property was 7.7%. The outlook for distribution growth in 2011 remains reasonable with expected distribution growth between 6% and 7%. Rising discount rates, due to an expectation of higher bond yields, will probably have a negative impact on capital growth during In general, a gradual and varied recovery is expected during Vacancies remain a concern, but are expected to gradually decrease during the year. An upward movement in offi ce rentals will most probably only be seen once vacancies have reduced substantially. The general outlook for the retail property market is more optimistic with some retail sectors performing better than others due to changing demographics, the growing middle class, government grants, etc. The fact that operating costs will continue to rise faster than income growth, mainly due to rates and taxes and electricity charges, remains a huge concern for the industry. Although most of these costs are normally recovered from tenants, they will impact on tenants total cost of occupation and could ultimately reduce rental growth for landlords. The construction industry is still going through a tough time. Due to fewer new developments and a lag on government infrastructure projects, this is expected to continue into The impact of the Consumer Protection Act, which came into effect in April 2011, on the commercial property industry remains unclear while industry bodies are seeking clarity on some provisions of the Act. While the Act provides additional protection for consumers, it might have severe implications for landlords, developers and owners. 11

16 Board of directors HENDRIK BESTER PETER COOK PETER MOYANGA MERVYN SEREBRO MEMBERS OF THE AUDIT AND RISK COMMITTEE OTHER BOARD MEMBER INA LOPION HERMINA CHRISTIANA LOPION (51) Executive director: asset management BSc, University of Stellenbosch, Sanlam Executive Development Programme: Manchester Business School Ina has 20 years property experience and six years life insurance experience within the Sanlam Group. She is responsible for asset management of the Sanlam investment property portfolio and the Vukile group property portfolio. GERHARD VAN ZYL (51) Chief executive B Eng (Hons) Hons B (B & A), MBA Gerhard has 20 years experience in the property industry and was the president of the South African Property Owners Association (SAPOA) during 2003/2004. He worked at the Department of Water Affairs of Namibia from 1984 to 1985 whereafter he studied full time towards an MBA degree at the University of Stellenbosch. Following this, he was appointed as senior engineer at MBB Consulting Engineers. Between 1988 and 2003, he held various positions in the Sanlam Group and was managing director of Gensec Property Services prior to joining Vukile. MICHAEL JOHN POTTS (56) Financial director CA(SA), HDip Tax Law (Wits) Michael was previously an independent advisor to the Bridge Capital Group on property transactions, property portfolio assembly, fi nancial structuring and capital raising. Prior to that, he was managing and fi nancial director of the South African group that forms part of the UK-based Hanover Acceptances Group and was involved in the restructuring of the South African group and the introduction of effective management reporting systems and strategic planning methodologies. Michael was also a non-executive director of Hanover Acceptances Limited (United Kingdom) and Outspan International Limited for six and seven years respectively. ANTON DIRK BOTHA (57) Non-executive chairman BCom, BProc, BCom (Hons), Stanford Executive Programme Anton is a director and co-owner of Imalivest, an investment group that manages proprietary capital provided by its owners and the Imalivest Flexible Funds. He also serves as a non-executive director on the boards of the JSE Limited, the University of Pretoria, African Rainbow Minerals Limited, Sanlam Limited and Sanlam subsidiaries. He is a past president of the Afrikaanse Handelsinstituut and is actively involved in organised business. HENDRIK SCHALK CONRADIE BESTER (60) Independent non-executive director BCom (Hons), FIA, Harvard ISMP:AMP Hendrik was a senior general manager and later an executive director of Sanlam between 1997 and Before 1997, he held various positions in the Sanlam group. Other previous directorships include Gensec, Sankorp, Sanlam Unit Trusts, Sanlam Properties, SA Retail, SAGDB and Barnard Jacobs Mellet Holdings. He is a past president of SAPOA, a former director of the Board of Quantity Surveyors and served on the Van Huysteen Commission on government properties. 12

17 MERVYN SEREBRO HENDRIK BESTER MLUNGISI HLONGWANE MIKE POTTS GERHARD VAN ZYL MEMBERS OF THE INVESTMENT COMMITTEE MEMBERS OF THE HUMAN RESOURCES AND NOMINATION COMMITTEE PETER JOHN COOK (64) Non-executive director BSc Eng (Wits), MBA (Wharton) Peter retired as an executive director of Sanlam s fi nancial engineering subsidiary Sanlam Capital Markets (SCM) in He continues to serve on the board and board committees of SCM and other Sanlam subsidiaries. Peter was the deputy chief executive of Gensec Bank (now SCM) from 2001 to 2004 and the executive director responsible for fi nance, risk management and other support functions of investment banking group Genbel Securities from 1997 to From 1993 to 1997, Peter was the fi nance and administration director of the oil company, Engen. Prior to 1993 he held various executive fi nancial and investment positions in the mining fi nance house, Gencor. JONATHAN MLUNGISI HLONGWANE (47) Non-executive director Mlungisi is a director and shareholder of Isolenu Group Holdings, which owns a commercial property portfolio across the country, both in the unlisted and listed sectors. He has been involved in civic and community movements since 1979 and is the past national president of the South African National Civic Organisation (SANCO). He serves as chairman of Lazarus Capital (Pty) Ltd. ANTON BOTHA MLUNGISI HLONGWANE PETER COOK BANUS VAN DER WALT MERVYN HYMIE SEREBRO (64) Independent non-executive director Mervyn is the chief executive offi cer of Vusani Property Investments, a fully empowered privately held consortium embracing retail and offi ce properties. He spent 32 years with the OK Bazaars Group within which he held a number of key positions and directorships, including that of group managing director. Mervyn was integrally involved in the establishment of a South African Bone Marrow Registry after the untimely death of his son Darren of leukemia. He is also the vice chairman of Reach for a Dream. PETER SIPHO MOYANGA (46) Independent non-executive director Peter is a well-recognised expert in the fi eld of franchising, property and business development. He was employed by McDonalds Corporation in 1995 where his initial function was as a senior property network developer responsible for strategic physical brand positioning. In 1999, Peter was appointed franchising manager for McDonalds (South Africa) (Pty) Ltd and later in 2001 he was promoted to multi department head, responsible for fi eld service, information and technology department, operations development and franchising. URBANUS JOHANNES VAN DER WALT (61) Non-executive director B Econ (Hons), Advanced Executive Programme Banus was the previous managing director of Sanlam Properties and Gensec Property Services. He has in excess of forty years of property experience with the Sanlam Group. Banus previously served as nonexecutive director of Martprop, Acucap, SA Retail and ifour and is a past president of the SAPOA. He is currently a non-executive director of Sanlam Properties, PEC Management Services, Vusani Property Investments and Capital Property Fund Limited. 13

18 Group structure VUKILE PROPERTY FUND 100% 100% Katima Mulilo Properties (Pty) Ltd MICC PROPERTY INCOME FUND LIMITED 3.5% 96.5% MICC PROPERTIES NAMIBIA (PTY) LTD Katatura Properties (Pty) Ltd 100% Kavango West Properties (Pty) Ltd Oluno Properties (Pty) Ltd MICC PROPERTIES (PTY) LTD South African properties The South African properties are held in the name of MICC properties Oshakati Properties (Pty) Ltd Oshikango Properties (Pty) Ltd Super Deca Properties (Pty) Ltd MICC House Namibia (Pty) Ltd The Namibian properties are held in individual holding companies The executive committee The executive committee (Exco) supports the CEO in carrying out the duties delegated to him in terms of the approval framework. The Exco meets regularly to ensure that strategy is implemented, internal controls and governance practices are functioning properly and that operations are being performed effectively. The Exco consists of: EXCO MEMBERS GERHARD VAN ZYL (51) Chairman of the Exco Chief executive officer B Eng (Hons) Hons B (B & A), MBA MICHAEL JOHN POTTS (56) Financial director CA(SA), HDip Tax Law (Wits) HERMINA CHRISTIANA LOPION (51) Executive director: asset management BSc, University of Stellenbosch, Sanlam Executive Development Programme: Manchester Business School RALPH WELLHONER (46) Senior financial manager BCom, BCom (Hons) 14

19 Report to stakeholders REPORT TO STAKEHOLDERS As a direct result of synergy between its physical and human capital, Vukile has accomplished a number of remarkable achievements over the past few years, consistently outperforming its peers in its pursuit of long-term sustainability, capital appreciation and income growth for its linked unitholders. 15

20 Report to fi nancial stakeholders FINANCIAL AND NON-FINANCIAL HIGHLIGHTS DISTRIBUTION HISTORY GROWTH IN DISTRIBUTIONS 16

21 LINKED UNIT PRICE REPORT TO STAKEHOLDERS Investment portfolio at 31 March 2011 Retail Offices Industrial Total Value (Rbn) Number of properties GLA % of total GLA Net property income (Rm) % of net property income Value per m² Average contracted escalation (%)* Average lease period (years) * For the year ending 31 March FINANCIAL RESULTS Group profi t available for distribution increased by 26.2% from R323.3 million to R408.1 million. The distribution for the full year ended 31 March 2011 is cents per linked unit. The fi nal distribution of cents per linked unit represents an increase of 10.2% over the comparable six month period and the full distribution increase is 9.0% higher than the previous year s distribution of cents per linked unit. The 9.7 cents per linked unit increase in distributions year-on-year is made up as follows: Cents per Cents per linked unit linked unit Contributions to increased rental income Increased rentals on new and renewed leases reduced by increased vacancies Additional rentals from property acquisition 12.8 Additional municipal service recoveries and other Increase in property expenditure (7.6) (11.2) Increase in net group property revenue Additional net income from asset management business Less: adjusted prior year asset management fees for full year (8.5) Increased net fi nance costs (6.6) (0.5) Increased administrative expenses, taxation and retained income (0.7) (2.7) Adjustment for issue of additional linked units (2.3) (3.7) Less: R10 million distribution foregone by Sanlam Properties (3.3) 3.3 Net increase in distribution The net asset value of the group has increased over the reporting period by 7.6% from 932 cents per linked unit (adjusted for additional units in issue) to cents per linked unit at 31 March The change in net asset value per linked unit, based on linked units in issue at year end, is set out in the NAV bridge graph on page

22 Report to fi nancial stakeholders (continued) NAV BRIDGE The group net cash fl ow, refl ecting the composition of cash generated and utilised during the year under review, is set out in the graph below. GROUP NET CASH FLOW 12 MONTHS ENDED 31 MARCH 2011 The asset management business segment performed well during the year. Asset management fees of R33.6 million were earned which was R3.1 million higher than the income forecast in the circular to shareholders dated 26 November Likewise, net sales commission of R29.6 million was R5.3 million higher than forecast in the circular due to higher than expected disposals in the Sanlam portfolio. Costs were well contained at R20 million. Group corporate administration expenditure of R25.5 million refl ected an increase of R1.7 million (7.3%) over the previous year. Group fi nance costs, net of investment and other income, increased by R16.1 million, from R133.3 million to R149.4 million. This increase is primarily due to the additional bank debt of R201.8 million raised to fi nance the acquisition of the property portfolio from Sanlam. 18

23 SIMPLIFIED INCOME STATEMENT Group Group Note R000 R000 Calculation of distributable earnings Net profi t from property operations excluding straight-line income adjustments Net income from the asset management business Investment and other income Administrative expenses (25 509) (23 781) Finance costs 3 ( ) ( ) Taxation (excluding deferred tax on revaluation adjustments) (6 401) (6 880) Available for distribution REPORT TO STAKEHOLDERS Note 1: The asset management business operated only for three months in the previous year with insignifi cant sales commission generated during that period. Note 2: The decrease in investment and other income is due to a once-off dividend of R8.8 million received from VIPS in the prior year. Note 3: The additional fi nance costs are as a result of bank debt of R201.8 million utilised in the acquisition of the R541 million portfolio from Sanlam in September LIQUIDITY During the 12 months ended 31 March 2011, 66.7 million linked units were traded (2010: 67 million linked units) which equates to approximately 5.6 million linked units per month. This represents 43% of the free-fl oat, when evaluated against the background that approximately 53% of the linked units held by the Sanlam Group and the BEE shareholders are not traded. This compares favourably with other PLS companies. LINKED UNIT PRICE PERFORMANCE BORROWINGS The group s borrowing capacity is, in terms of its memorandum of incorporation, not limited. The board policy is to limit gearing to 45%. The group s gearing ratio at the end of the fi nancial year was 31.5% compared to the bank and securitisation covenants of 50% and 65% respectively. The group has unutilised bank facilities of R279 million. On 8 November 2010, securitisation debt of R462 million was successfully refi nanced via the securitisation vehicle at an all-in cost of fi nance of 9.76%, which is 0.44% lower than the previous rate of 10.2%. The issue was 2.7 times over-subscribed. Following the extension of certain interest rate swaps and the above securitisation refi nancing, the group s cost of debt has reduced from 10.4% per annum at 31 March 2010 to 9.77% per annum inclusive of margins and costs at 31 March

24 Report to fi nancial stakeholders (continued) BORROWINGS (continued) Bank loans to a subsidiary of R452 million mature in July and August Four banks have been approached to refi nance these loans. At this stage, indicative facility letters have been received from certain of the above banks at favourable interest rates. We intend to fi nalise the refi nancing of these expiring loans at all-in hedged rates which are lower than the current fi xed and hedged rates. 98% of the group s total interest bearing debt was hedged at year end. The borrowings and particulars of interest rate swaps are detailed in note 18 to the annual fi nancial statements included in this integrated report. PROPERTY PORTFOLIO The group s investment strategy incorporates the following: New acquisitions should exceed R50 million in value. Retail centres to be located preferably in lower income or previously disadvantaged areas where transport support (i.e. taxi ranks) is in close proximity. Centres in the lower income areas should be tenanted by at least 75% national retailers. Offi ces must be A grade quality, located in sought after areas with good quality tenants. Industrial developments must preferably be mini units; larger unit developments will be driven by tenant demand, (i.e., no spec developments will be undertaken) with a lease term of at least fi ve years and good quality tenants. The portfolio is continuously assessed to ensure that any risks to properties are identifi ed timeously and remedial action taken where required. This could entail a revamp or expansion of a building to maximise trading opportunities or the sale of properties which are no longer considered to be core and replaced with higher quality properties in preferred locations. The group property portfolio at 31 March 2011 consisted of 74 properties with a gross lettable area of m². Net property revenue, excluding straight-line rental income accrual, increased from R475 million to R542.5 million (14.2%) primarily as a result of the acquisition of the R541 million portfolio from Sanlam, good rental escalations and improved recoveries of electricity and municipal consumption costs. If acquisitions and disposals are excluded, on a like for like basis, group net property revenue increased by 9.5% from 2010 to Full details of the property portfolio are set out in note 33 to the annual fi nancial statements included in this integrated report. TOP 10 PROPERTIES BY VALUE Directors valuation at 31 March Valuation Rentable 2011 % Rand Location area m² R000 of total per m² Durban Phoenix Plaza Durban Bellville Louis Leipoldt Hospital Bellville Randburg Square Randburg Dobsonville Shopping Centre Soweto Pine Crest (50%)* Pinetown Durban Embassy Durban Oshakati Shopping Centre Oshakati Daveyton Shopping Centre Daveyton Roodepoort Hillfox Power Centre Roodepoort Arivia.kom Building (Midrand) Midrand * Vukile owns 50% of the Pine Crest Centre in Pinetown. The other 50% is owned by SA Corporate Real Estate Fund. The geographical and sectoral distribution of the group s portfolio is indicated in the graphs opposite. The portfolio is wellrepresented in most of the provinces, with the bulk in Gauteng and KwaZulu-Natal. 20

25 GEOGRAPHICAL PROFILE GEOGRAPHICAL PROFILE REPORT TO STAKEHOLDERS SECTORAL PROFILE SECTORAL PROFILE The group is of the opinion that the current sectoral and geographical profi le broadly conforms to the requirements of a well-balanced mixed portfolio and there is, therefore, no specifi c strategy to increase or decrease these profi les. These profi les are largely unchanged from the previous year. New leases and renewals of m² with a contract value of R945.5 million were concluded during the year, including a renewal of a 15 year lease at Louis Leipoldt Hospital with Medi-Clinic at a contract value of R486 million. 82% of leases that expired during the year ended 31 March 2011 were renewed or are in the process of being renewed (2010: 90%). The reduction in renewals is mostly due to government leases that were still in the process of being renewed at year end as well as a number of lease renewals that were held back, pending possible large refurbishments. The group is implementing a process to improve the renewals percentage. 21

26 Report to fi nancial stakeholders (continued) GROUP LEASE EXPIRY PROFILE RETAIL LEASE EXPIRY PROFILE OFFICES LEASE EXPIRY PROFILE 22

27 INDUSTRIAL LEASE EXPIRY PROFILE REPORT TO STAKEHOLDERS The group lease expiry profi le graph refl ects that at least 38% and 19% of the leases are due for renewal in 2012 and 2013 respectively. This means that in the year ahead, approximately 40% of leases will be renewed at market related rates. The rental escalation graph below refl ects that contracted rental escalations are between 8.4% and 9.0% for the year ending 31 March CONTRACTED RENTAL ESCALATION PROFILE AVERAGE ANNUAL ESCALATION VACANCY PROFILE At 31 March 2011, the portfolio s vacancy (measured as a percentage of gross rental) was 5.1% compared to 4.1% at 31 March This is a slight improvement on the vacancy of 5.3% at 30 September 2010, which is partly as a result of an increase in letting enquiries, aggressive broker launches and advertising. The largest vacancy in the portfolio is at Randburg Square which refl ected a vacancy at year end of 5 103m². This is due to a major revamp of the centre at an estimated cost of R64 million. This revamp, which will commence shortly, entails a re-mix of tenants and the introduction of new tenants. Vacancies have not been fi lled pending this major revamp. The properties with higher than normal vacancies are actively marketed through advertising campaigns, broker functions and continuous pressure on the property managers to source tenants. 23

28 Report to fi nancial stakeholders (continued) VACANCY PROFILE OF INDIVIDUAL PROPERTIES VACANCY PROFILE OF INDIVIDUAL PROPERTIES GLA summary GLA m² Balance at 1 April GLA adjustments (303) Disposals (62 982) Acquisitions and extensions Balance at 31 March Vacancy summary Area m² % Balance at 1 April Leases expired ( ) } Renewals of expired leases Contracts to be renewed Tenants vacated (49 245) 0.08 New letting of vacant space Leases terminated in lease period (978) Balance at 31 March Financial performance Rm Rm % GROUP Gross property revenue % Property expenses (293.6) (267.1) (9.9%) Net property income (1) % Property expense ratios* 34.1% 34.5% (1) Property interest paid and received has been reclassifi ed to fi nance costs and investment income respectively and internal asset management fees have been reversed. * Recurring cost to property revenue ratios (including rates and electricity costs). Recurring property expenses have decreased slightly year on year as discussed in more detail below. As the rising costs of electricity and rates and taxes items are negatively impacting on our tenants ability to pay their rent, we have implemented the following measures to try and alleviate these costs: Appointing a specialist at a cost of R0.8 million over a three year period to value all the group s properties where the municipal valuations appear to be higher than market and to lodge the appropriate objections and appeals. Annual savings of rates and taxes of R8.6 million have been achieved as a result thereof. An appropriate percentage of such savings are refunded to the tenants. Apart from the obvious steps taken to reduce energy consumption by replacing older technology with newer, more energy effi cient technology, the group has embarked on an in-depth pilot study in respect of two of its larger properties to formulate a comprehensive strategy to reduce energy consumption costs. 24

29 RECURRING COST TO PROPERTY REVENUE RATIOS AVERAGE CONTRACTUAL BASE RENTAL INDUSTRIAL REPORT TO STAKEHOLDERS The group continuously evaluates methods of containing costs in the portfolio. As a result of the measures referred to earlier, the recurring costs to property revenue ratios (excluding electricity and rates and taxes) have decreased from 16.48% to 15.26% year on year. The portfolio tenant profi le is set out in the graph below: PORTFOLIO TENANT PROFILE 25

30 Report to fi nancial stakeholders (continued) AVERAGE Average Gross Rental CONTRACTUAL Retail BASE RENTAL RETAIL AVERAGE CONTRACTUAL BASE RENTAL OFFICES The average monthly rental rate per sector at 31 March 2011 is as follows: Property R/m² Retail Offi ces Industrial

31 The graph below indicates the actual escalations of contract rentals achieved on renewals compared to the expiry rentals for the year ended 31 March RENEWAL RENTAL ESCALATION TO EXPIRY RENTALS NEW TRANSACTIONS: RENTALS CONCLUDED/ BUDGETED REPORT TO STAKEHOLDERS In line with the trend in the market, the renewal escalations for retail of 6.5% have been lower than that of the industrial and offi ce sectors. The above graph refl ects the fact that, during the year under review, new leases were being concluded below our budget for the industrial and offi ces sectors. PROPERTY ACQUISITIONS AND DISPOSALS ACQUISITIONS COMPLETED The following properties were acquired on 3 September Total rentable Purchase area price Property Region m² Rm* Amanzimtoti Jeffels Road Warehouse KwaZulu-Natal Kimberley Kim Park Northern Cape Nelspruit Sanlam Centre Mpumalanga Pinetown Westmead Kyalami Park KwaZulu-Natal Pretoria Hatfi eld Sanlam Building Gauteng Pretoria Sanwood Park Gauteng Rustenburg Edgars Building North West Sandton St Andrews Complex Gauteng Sandton Sunninghill Place Gauteng * Includes transaction costs. This portfolio acquisition was fi nanced as follows: Issue of linked units Bank fi nance Surplus cash Total Rm 27

32 Report to fi nancial stakeholders (continued) FUTURE ACQUISITIONS Giyani Plaza The group announced on SENS on 11 April 2011 that Giyani Plaza is to be acquired from Sanlam Life Insurance Limited at a total capital outlay of R71.9 million, including transaction costs. This 9 443m² centre is located in Giyani, approximately 70 kilometres east of Makhado (Louis Trichardt) in the Limpopo Province. The major tenant is Pick n Pay (1 804m²). The centre has 80% national tenants and an initial yield of 10.2% is forecast. EXPANSIONS, REVAMPS AND DISPOSALS The expansion/revamps undertaken to the Oshakati Shopping Centre and Oshikango Centre were completed during the year within budget. New revamps/income protecting capital projects are summarised below: Malamulele: Bellville: Grosvenor Mala Plaza Louis Leipoldt Corner upgrade extension Hospital upgrade Hillfox Centre Approved capital R7.5m R16.75m R33.50m R12.5m Extensions R16.75m R12.5m Upgrade R7.5m Refurbishment R33.50m Additional GLA 1 222m² 0m² 1 337m² Year 1 yield 0.0% 9.3% 0.0% 10% Completion date 30 Nov Mar April Nov 2011 Progress Tenants information Practical Work is in Work is in meeting held completion progress progress Plans for council achieved on submission being done 31 March 2011 The total cost of acquisitions, developments and tenant installations for the year ended 31 March 2011 amounted to R622.9 million (2010: R58 million). Properties sold as part of the group s winnowing strategy are set out below: Property Sales price R000 Randburg Hillcrest Centre Pongola City Shopping Centre Pretoria 227 Andries Street JHB Atlas Road Complex Benoni Kleinfontein Offi ces: Erven 36 to Benoni Kleinfontein Offi ces: Erf Benoni Kleinfontein Offi ces: Erven 43 to Amanzimtoti Jeffels Road (Warehouse) Nelspruit Game Cape Town Ndabeni Business Park Total The proceeds from property sales will be utilised to acquire properties that meet our quality requirements and/or to fund expansions and revamps, thereby further enhancing the quality of the portfolio. 28

33 QUALITY OF MANAGEMENT The group s performance and sound fi nancial position are a direct result of the synergy between its two primary capital sources, namely our physical capital and human capital. Vukile s human capital enables the group to employ its physical capital, a diverse property portfolio, in order to deliver above average results for our linked unitholders. Linked unitholders have enjoyed the results of this synergy, with Vukile achieving a number of remarkable achievements over the past few years. These achievements include being ranked second and fi rst by Catalyst Fund Managers for individual stock performance in the 2010 and 2009 calendar years respectively. These rankings indicate that Vukile has consistently outperformed its peers in the preceding two years in terms of total returns generated for linked unitholders. However, Vukile s greatest achievement and a true testimony to its ability to achieve the objective of producing long-term sustainability, capital appreciation and income growth for linked unitholders, is evidenced by it achieving 27th place out of the Top 100 Companies listed on the JSE Limited. The Top 100 rankings, as published by the Business Times - the business supplement of the Sunday Times newspaper - during November 2010, showed that Vukile achieved compound annual returns of 26.75% per annum over the preceding fi ve year period. The ranking also showed that this performance was rivalled by only one other company from the Property Loan Stock sector. It is therefore clear that Vukile s performance track record speaks not only of the quality of our property assets, but more so of the quality of our management team and people. MANAGEMENT MODEL AND EXPERIENCE Vukile took the strategic decision to adopt an internal asset management model ( IAM model ) in September Prior to the adoption of the IAM model, the asset management function was outsourced to Sanlam Properties (Pty) Ltd ( Sanlam Properties ). In addition to adopting the IAM model, Vukile acquired the asset management business of Sanlam Properties, which is responsible for the property asset management of the Sanlam investment property portfolio, with effect from 1 January As a result of the aforementioned, the staff complement has grown signifi cantly and stood at 30 individuals at 31 March The majority of the staff members that joined as a result of the acquisition of the property asset management business had a prior working relationship with Vukile. Some individuals were involved with the listing of Vukile on the JSE and others have been rendering property asset management and support function services to Vukile since its listing. As a result, the integration of culture, systems and processes has been relatively seamless. The group prides itself on the fact that we have one of the most experienced management teams within the property industry with a collective property industry experience of 363 years, an attribute that is not easily matched within our industry. OUTSOURCED PROPERTY MANAGEMENT FUNCTION Vukile has outsourced the day-to-day management of our buildings to four property management companies, namely JHI Property Services, Hermans and Roman Property Solutions, Kuper Legh Property Management and Old Mutual Properties ( property managers ). These property managers deal with daily property operations such as leasing, invoicing of tenants, debt collection, maintenance, tenant interaction, fi nancial administration and the management of relationships with service providers and local government. Monthly meetings are held with the property managers to monitor performance and operational issues. TRAINING AND DEVELOPMENT Vukile believes that, not unlike physical capital, human capital needs to be maintained, improved and developed over time. The group encourages its people, especially younger employees, to further their academic studies in areas that are appropriate to the group s business. Approximately 20% of the staff complement is currently enrolled for studies with recognised institutions in areas such as accountancy, fi nancial management and industrial psychology. Vukile supports these candidates by providing fi nancial support for tuition, academic materials and study aids and paid study leave of up to 10 days per annum. The group ensures that employees maintain sound industry and technical knowledge by facilitating regular attendance of training courses, seminars and other industry initiatives by employees at the group s expense. Employees belonging to professional bodies are encouraged to maintain their Continuous Professional Development ( CPD ) status in line with the relevant professional body s standards. REPORT TO STAKEHOLDERS 29

34 Report to commercial stakeholders PROPERTY ASSET MANAGEMENT CLIENT Through the asset management business acquisition, Vukile assumed responsibility for the property asset management of the investment property portfolio of ±R9bn owned by Sanlam. The asset management business contributes 7.2% of Vukile s total turnover. Therefore Sanlam remains one of Vukile s key stakeholders. The Sanlam property committee was established to facilitate quarterly feedback to Sanlam on the performance of its portfolio. The strategic direction for the Sanlam portfolio, Vukile s mandate for sales and acquisitions and Vukile s performance targets are also determined by this committee. The new reporting lines to Sanlam via the property committee and its members have been bedded down and there is a healthy working relationship and mutual respect between the two entities. TENANTS Our philosophy remains to offer our tenants best value for money in a specific area, by offering an enhanced shopping or business experience which is aligned with the aspirational needs of our clients. We also understand that the success of our tenants businesses is closely linked to that of our own. We continuously utilise our financing facilities and free cash from disposals to invest in the upgrade of our portfolio, thereby providing better facilities to our tenants. In time, improved facilities will attract customers and allow our tenants to perform better, thus improving their ability to meet their rental payments. When we acquire a property, be it retail, offi ce or industrial, we do so after a rigorous process of internal risk assessment. In particular, we consider the long-term demand for the premises, its age, accessibility and suitability for tenants needs. We take a long-term view of these properties and, as such, are committed to ensuring that they provide a solid platform from which our tenants can build their own businesses. 30

35 GENERAL MARKET TRENDS AND TENANT RETENTION Due to the fact that a substantial portion of Vukile s retail portfolio is situated in rural and township areas of South Africa, it was relatively protected from the impact of the recent global fi nancial crisis. Further protection resulted from the high percentage of national tenants in our centres selling staples with a strong brand loyalty. REPORT TO STAKEHOLDERS We believe that retail and industrial premises have weathered the storm and are over the worst. On the offi ce side, however, the pressure is still being felt in the market as demand is slow to recover due to oversupply, as well as rapidly rising costs of electricity and rates and taxes. Our response has been to focus on cost reduction and tenant retention, since retaining existing tenants is much more cost effective than placing new tenants. In South Africa, the trend for companies to move out of the CBDs has persisted. About 25% of our offi ce sector GLA is exposed to the Pretoria CBD, but due to the fact that 75% of our offi ce portfolio in Pretoria is occupied by government, vacancies have remained stable. New developments in the Hatfi eld, Lynnwood and Menlyn areas of Pretoria present a risk to vacancies and letting in the CBD. Government is also aggressively cutting costs in light of the budget defi cit. Given the cost of relocation and the shortage of suitable premises, it is unlikely that government tenants will relocate, but rentals on renewals may be subject to downward reversion. 82% of leases that expired during the year ended 31 March 2011 were renewed or are in the process of being renewed (2010: 90%). Management is implementing plans to improve tenant retention. An important part of protecting the group against the likelihood of our tenants from defaulting on their lease agreements, is our credit vetting process prior to the acceptance of a tenant. We have developed a comprehensive screening system for each applicant, which assesses the tenant according to type (national, government, SMMEs, etc), nature of business, main shareholders and other relevant characteristics, and in the case of renewals, payment history. The most signifi cant cash fl ow risk faced by our business is the inability to collect rental payments timeously. We are particularly negatively impacted by late payments resulting from changes in governmental payment systems and processes. As such, it is important to closely monitor our arrears book and any changes to government payment processes. We measure the effectiveness of our collections process based on the percentage collections made by the fi fth business day of each month. On average, our collection percentages on the fi fth business day for the last two years were as follows: Property Offi ce 77.0% 79.6% Retail 76.1% 76.9% Industrial 66.6% 67.7% Our average lease period is 2.4 years. We consider our tenant concentration risk to be moderate as the top 10 tenants account for 20.9% of total GLA. Government is the single largest tenant, occupying 6.8% of total GLA. Approximately 54% of tenants are grade A and B tenants which include listed companies, government departments, national tenants and medium to large professional fi rms. A further consideration is the right mix of tenants. While we do not offer exclusivity to a particular type of retailer in any of our retail premises, we are obviously mindful of the complementary mix of line retailers to complement our national tenants. This is balanced with the fact that non-competition between competitive tenants is not allowed in terms of the Competition Act. 31

36 Report to commercial stakeholders (continued) SAFETY AND SECURITY Given the high levels of crime in South Africa, we are mindful of our duty as landlords to provide our tenants with safe and secure environments in which to trade and conduct their businesses. Related to this, is the safety of the staff and clientele of our tenants. Part of our role as landlords, therefore, is to mitigate risks common to the tenant and landlord, in order to maintain and improve tenant retention and stability of rental revenue. As a result of these efforts, we can report that, for the fi nancial year ended 31 March 2011, incidents of safety and security have been minimal: Zero cash heists. Six armed robberies. Five fi res. Three of the fi res mentioned above resulted in insurance claims under our asset-all-risk insurance policy. The increased monitoring and reporting of Occupational Health and Safety Act ( OHS Act ) compliance on all our premises is designed to prevent any incidents of this nature from affecting our insurance terms. The table below shows the breach of safety and security incidents for the past three years: Incidents Cash heists 3 2 Armed robberies Fires In order to ensure that our tenants businesses experience minimal interruption due to safety-related incidents, we have placed strict performance criteria on our property managers to monitor, report and manage incidents or potential risks of this nature. These include the following: Continuous OHS Act inspections performed by our property managers in accordance with the various property management agreements. Annual inspections by external health and safety specialists for compliance with the OHS Act. These inspections include tenant premises. The full range of legal requirements is covered in these inspections, such as demolition and construction work, asbestos, electrical installations, electrical machinery, environmental regulations (such as lighting, ventilation, noise, fi re precautions, critical equipment and evacuation), sanitation facilities, fl ammable liquids and hazardous chemicals, stacking, lifts and elevators. Tenant health and safety forums have been established at our major premises, and the local emergency services are invited to these meetings. All lease agreements contain a clause stipulating that each tenant must comply with the requirements of the OHS Act. It is unavoidable that signifi cant amounts of cash will be concentrated at our retail centres, or will be in transit at ATMs and bank outlets. Given the layouts and sizes of our retail centres, it is not possible to have dedicated areas for the handling of cash away from the public. It is also not possible for us to enforce the timing of refi lling of ATMs outside of normal business hours. 32

37 REPORT TO STAKEHOLDERS Our efforts with regards to protecting our tenants and their customers from the risks of crime during the fi nancial year ended 31 March 2011, included the following: Where possible, we have joined a local security forum with the attendance of the local police force. Through our property managers, we are represented on the Shopping Centre Council s anti-crime forums in conjunction with Business Against Crime. Where incidents of robberies have occurred, and where appropriate, we have installed additional cameras and security guards. Furthermore, when increased retail volume is expected, such as over Christmas shopping periods, we ensure that additional security measures are implemented on a pro-active basis with no increase to the rentals payable by tenants. We have formalised the provision of parking attendants in the parking lots of our retail facilities. The performance standards and conduct of these guards is stipulated in signed agreements with a contractor. As these guards are unarmed, no training in human rights or legal proceedings is required. Any incidents are reported by the property managers in their Occurrence Book and, where appropriate, full incident reports are submitted for insurance purposes. TENANT INTERACTION The property management agreements entered into between the property managers and the group include a compulsory minimum number of site visits to all tenants. For our larger retail centres, the property managers occupy a dedicated offi ce on the premises. In order to fi nd ways to further enhance customer satisfaction at our centres, we will conduct customer surveys on a sample basis in future. Although we currently rely on our property management companies to inform us of any tenant complaints, we will in future have tenant surveys done through independent consultants at key retail centres. RATES AND TAXES An expense category which has been widely publicised, is rates and taxes levied by municipalities. In addition to the problems experienced with the Johannesburg City Council in respect of incorrect billing, the fi nancial year ended 31 March 2011 saw an additional 18% increase in rates and taxes for commercial property, over and above the general 10% annual increases. This additional increase is currently being contested by SAPOA. Vukile has further employed independent valuation consultants to contest the valuations of our properties by municipalities at a cost to date of approximately R0.8 million. Annual savings of rates and taxes of R8.6 million have been achieved as a result of these objections and appeals. An appropriate percentage of such saving is refunded to the tenant. 33

38 Report to commercial stakeholders (continued) ENERGY AND GREEN BUILDING INITIATIVES MAINTENANCE AND UPGRADES One of the key objectives in terms of which we achieve our strategy, is the continuous maintenance of our properties. As such, we have current service level agreements in place to ensure that our properties are maintained to the highest relevant standards. This process helps to ensure that our tenants are operating in an environment that remains acceptable to their customers. The following examples demonstrate our commitment to continuous upgrading and redevelopment of our properties: A major refurbishment project valued at R46 million at Bellville Louis Leipoldt, a specialist healthcare property anchored by the Medi-Clinic Hospital Group. Expansion projects at Oshakati Shopping Centre and Oshikango Centre in Namibia and Mala Plaza Shopping Centre in the Limpopo Province, valued at R55 million. Upgrading and expansion projects at Hillfox Power Centre, Roodepoort, Grosvenor Crossing, Bryanston and Kim Park Shopping Centre, Kimberley. ENERGY The increasing cost of energy and the risk of supply interruptions have been an area of concern for the commercial property industry since the initial load shedding and much publicised problems faced by ESKOM, in The impact of ESKOM s supply problems has led to signifi cant increases in energy costs. The compounding effect of three consecutive 25% increases in electricity cost from will be material to operating cost structures. Given the current challenges of higher than normal arrears, defaults and vacancies, this places more pressure on an already strained commercial property sector. The Green Building Council estimates that electricity costs could rise in the near future to approximately 70% 80% of the cost of utilities consumed by a building and will therefore soon dominate buildings operational expenses. Our biggest concern for the commercial property sector is whether tenants will be able to absorb these additional operating costs. While the commercial property sector in South Africa still has to quantify its carbon footprint, we feel that our response should be to manage the operational costs of energy management. Thus, we are performing research and collecting relevant data to better understand opportunities for cost savings, which could alleviate the pressure of this increased cost on our tenants. At present, our observations are that the majority of the potential cost saving gains, to tenant and landlord, will be as a result of basic management practices such as responsible lights and air conditioning usage, especially at night and over weekends. GREEN BUILDING INITIATIVES Vukile is a member of the Green Building Council of South Africa ( GBC ). We embrace the vision and mission of the GBC as detailed below. Vision - The GBC will lead the transformation of the South African property industry to ensure that all buildings are designed, built and operated in an environmentally sustainable way that will allow South Africans to work and live in healthy, effi cient and productive environments. 34

39 Mission - To promote, encourage and facilitate green building in the South African property and construction industry through market-based solutions, by: Promoting the practice of green building in the commercial property industry. Facilitating the implementation of green building practice by acting as a resource centre. Enabling the objective measurement of green building practices by developing and operating a green building rating system. Improving the knowledge and skills base of green building in the industry by enabling and offering training and education. REPORT TO STAKEHOLDERS In terms of our green buildings initiatives, we have appointed a green building consultancy and have launched a pilot project consisting of two buildings, namely Bloemfontein Plaza Shopping Centre and Durban Embassy Offi ce Tower, for a full green building analysis. Based on the results of the pilot project, further roll-outs will be made in due course. Other current energy and green building-related actions undertaken include: The collection and analysis of data in respect of energy and water consumption for all properties. The installation of test meters at selected properties as a control measure for council meter readings. The allocation of responsibility to a senior executive as green building champion and GBC representative for Vukile. The investigation of green leases that provide a level of co-operation between the landlord and the tenant on sustainability issues and assisting those businesses qualifying for inclusion in a Carbon Reduction Commitment. Green building practices are already being applied in terms of waste management. Projects have been initiated at two industrial properties within the portfolio. The projects entail the sorting and separate storing of waste within the paper, plastics, glass and tin categories, and then on-selling this waste to recyclers. Further projects will be rolled out later in the year. 35

40 Report to the community In many respects, South Africa remains a deeply divided society, with communities in many areas still having specifi c aspirational needs and economic limitations. On 15 October 2010 the Department of Trade and Industry published the Draft Property Sector Charter in terms of the Codes of Good Practice for Broad Based Black Economic Empowerment ( BB-BEE ), in order to clarify the role of property in redressing these imbalances. The following notable points are, among others, included in the Charter: Property ownership is the basis for wealth creation in society and that, prior to 1994, black people could not own property and hence had limited opportunities for wealth creation. Property ownership in South Africa is concentrated in institutional investors, and the sector has done little in terms of skills development, employment equity and enterprise development. There is a lack of property investment in under-serviced areas. Given that our retail properties are generally located in rural areas or smaller towns, or in townships which were previously neglected, we are deeply aware of the difference that our premises can make to the communities which surround and depend on our facilities for their business or trade. We are proud of our record in investing in these under-serviced areas and see growth opportunities in areas servicing the emerging black commercial base. CORPORATE SOCIAL RESPONSIBILITY Vukile is involved in a number of socio-economic development projects with the communities that are served by our properties, especially our retail centres. The following projects are currently in operation: In Phoenix, served by the Phoenix Plaza Shopping Centre, we offer a bursary scheme aimed at grade 12 learners in the area to study at university. The project is a partnership between Vukile, Sanlam and our tenants. The response to this project has been very favourable, and it has received signifi cant praise from the local media. In Dobsonville, Soweto, we have established the Dobsonville Trust a Section 21 company aimed at job creation, skills development and the support of worthy community based charities. Vukile has contributed approximately R1 million towards this trust fund over the years since its inception. In addition to these projects, we regularly support various charities and community projects in areas such Magaung, Daveyton, Phoenix and Soweto and provide premises at low or zero rentals to Community Based Organisations ( CBOs ) such as the Blood Bank, Tower of Hope and the Jacob Zuma RDP Educational Trust. During the fi nancial year ended 31 March 2011, we contributed R to NOAH, a charity organisation which helps children who have been left orphaned or vulnerable due to HIV and Aids in Africa. 36

41 TRANSFORMATION AND BLACK ECONOMIC EMPOWERMENT ( BEE ) Vukile s BEE rating was finalised during the year ended 31 March 2011, a process that commenced before the internalisation of the asset management function and the acquisition of the Sanlam asset management business. The rating indicated that our BEE status requires significant improvement, with the ownership of a 21.05% equity stake in Vukile by Lazarus Capital (Pty) Ltd, a black controlled entity, representing our most significant BEE compliance component. Vukile, in its new model and staff complement, will have significantly more scope to implement BEE plans and strategies. REPORT TO STAKEHOLDERS We realise that BEE is an important factor in securing long-term government leases, and is also a factor in building a sustainable relationship with the communities around our properties. For example, we understand that the Department of Public Works only enters into long-term leases (beyond two years) with black-owned landlords. As mentioned earlier, about 25% of our offi ce sector gross lettable area ( GLA ) is exposed to the Pretoria CBD, but 75% of our offi ce portfolio in Pretoria is occupied by the government. Being a South African employer, we recognise the importance of transformation and employment equity as part of a sustainable business model. Given our relatively small staff complement of 30 people, comprised primarily of highly qualifi ed and experienced people, as well as having a very low staff turnover, we have found it diffi cult to fi nd candidates from previously disadvantaged groups to join the group at senior management and executive level. Our commitment to sustainable employment equity, as opposed to a tick the box approach, led the board to authorise the establishment of the Vukile Black Professional Development Programme ( the programme ). The programme is aimed at introducing highly trained and culturally integrated candidates from previously disadvantaged backgrounds into the senior and executive management structure of the group over the medium-term. The programme is structured as follows: Identifying a suitable candidate, based on specifi c profi ling, with the help of a specialist head-hunter and making an appointment. Designing a competency matrix of technical and managerial skills required for the specifi c position and the relevant assessment criteria. Developing a mentoring programme with fi rm deliverables. Formal training programmes and continuous assessment. Identifying opportunities for the candidate within the current succession plan. Thulani Makubu is the fi rst trainee asset manager of the Black Professional Development Programme. The programme was offi cially launched on 1 September 2010 with the appointment of Mr Thulani Makubu in the capacity of trainee asset manager. As at 31 March 2011, Mr Makubu has completed 60% of the deliverables required for the successful completion of the programme and it is envisaged that 100% should be achieved during the second quarter of

42 Report to the community (continued) PREFERENTIAL PROCUREMENT Procurement is a signifi cant opportunity for Vukile to improve its BEE rating. In addition to this, we see localisation of procurement as an important means to build the relationship between a shopping centre and the local community, and hence sustain the loyalty of the community to the retailers. This needs to be managed in line with quality of service, and our screening process for suppliers therefore considers not only BEE credentials, but also price and track record. A formal procurement exercise is conducted every three years for general services, such as security, maintenance and cleaning. Our next procurement exercise will be conducted during the 2012 fi nancial year. Some of the criteria on which we rate applicants for selection are as follows: Financial status and stability, including insurance cover. BEE credentials, including racial composition of management, experience and training of personnel. Capability and service excellence, including after-hours service and service during holidays. Environmental and risk management. Affi liation with regulatory councils and associations. Vukile endeavours to promote local suppliers from the community which our properties service. For example, at our Daveyton Shopping Centre, a community forum has been established to consider various community issues, including local procurement and new suppliers that can be utilised by Vukile in support of enterprise development. MEMBERS OF THE PUBLIC In order to gain a better insight into the minds and thought processes of our tenants customers, we will focus on monitoring the following responses from members of the public who frequent our shopping centres during the year ending 31 March 2012: Whether the tenant mix refl ects the retailers that shoppers would like to see. Cleanliness, safety, security, etc. Adequacy of signage, parking, toilets and other common amenities. Additional functions (such as fl ea markets or entertainment events) or promotions (such as mardi-gras, beauty pageants, etc) which would attract the public. Since members of the public frequent all of our properties, we have ensured that adequate insurance cover is in place in respect of public liability. Although there have been a few reported incidents at our properties, (mostly slips and trips claims in retail centres) the majority of these claims prove not to be the fault of the landlord. 38

43 BUILDING SUSTAINABLE COMMUNITIES We recognise the important roles that retail facilities play in the shaping and empowerment of communities. The public use these centres to gather, socialise, shop, bank, collect social grants and generate local economic activity. In this regard we present the case study of Moratiwa Crossing. REPORT TO STAKEHOLDERS Drawing on the experience of our staff from developing rural shopping centres during the early nineties, Vukile in November 2006 entered into negotiations with a developer for the construction of a m 2 GLA centre at Monsterlus, 30 kilometres north-east of Groblersdal. As this was the fi rst development of this nature by Vukile, we included several features to ensure that the proposition was a successful one. The developer identifi ed the need for a centre in the region based on demographic studies. These studies researched the detailed composition and growth potential of the customer base in the area based on a transport catchment model. We were involved at the earliest stages of the project. In particular, we ensured that community support for the project was obtained. The taxi associations, local community leaders and ward councillors were all consulted on a very detailed level and their support for the project secured. The developer negotiated with the land owner, a prominent black family, to do the development on a joint venture basis. This implied that, after the land value was included in the project, the project had a 5.5% residual BEE shareholding once we had bought out the developer. This was of critical importance when negotiating not only with the community stakeholders, but also with the local authority which was not able to provide the required services. We therefore had to develop all the services to the project, such as drilling our own boreholes to secure water supply, provide electricity to the site and building sewage treatment facilities, as well as arranging our own refuse removal services. There were also other unique features associated with this development which we implemented to ensure its success: We required a higher than normal national tenant occupancy of 85%. This was done to ensure the long-term sustainability of our tenants. Fortunately, the demographic studies performed at the outset provided them with a suffi ciently robust business case to support their participation in the centre. 39

44 Report to the community (continued) BUILDING SUSTAINABLE COMMUNITIES (continued) It was imperative that we enlisted the support of the taxi associations as they would provide transport to the majority of customers to the centre. We also developed a formal taxi rank with ablution facilities, roof covers and waiting areas. This enabled us to provide a much lower parking ratio normal retail centres require six parking bays per 100m² of GLA, but since a taxi delivers on average 14 customers per vehicle, we were able to develop the centre with three bays per 100m². We have noticed that many of the pensioners and mothers who travel to the centre to receive their pensions and social grants, stand in long queues for their payments. In order to protect them from the heat of the sun and the rain, we are planning to build covered waiting areas. These visitors to the centre will be more likely to conduct their purchases at the centre once their payments are received, thereby showing the benefi ts to the tenants of our efforts to accommodate the community s needs. Moratiwa Crossing was opened in November 2007 and the success of the centre is evident. Based on this positive result, we are currently investigating similar types of centres for lower income areas and are confi dent that the lessons learnt from Moratiwa will ensure the ongoing success of this component of our portfolio. 40

45 GOVERNANCE AND REMUNERATION REPORT Governance and remuneration report The group s corporate governance systems and practices are the platform from which sustainable value is created. 41

46 Corporate governance report Vukile Property Fund Limited subscribes to impeccable ethical standards and the principles of corporate governance. The group s corporate governance systems and practices are the platform from which sustainable value is created by meeting our objective to invest in properties with strong contractual cash fl ows for longterm sustainability, capital appreciation and growing income distributions for linked unitholders. REGULATORY COMPLIANCE ENVIRONMENT Vukile Property Fund Limited ( Vukile ) is a group incorporated in South Africa under the provisions of the Companies Act. The group operates in South Africa and Namibia and is listed on both the JSE Limited ( JSE ) and Namibian Stock Exchange ( NSX ). APPLICATION OF KING III The board of Vukile has considered the principles as contained within King III and strives to apply the principles in a manner that refl ects our stature, market position and size. In line with the aforementioned, management, assisted by KPMG Advisory Services, is currently fi nalising a review of the board charter and the terms of reference of each board committee in line with King III. Adoption of the revised charter and terms of reference is expected to take place in August Although many of the principles contained in King III were applied during the year ending 31 March 2011, the board has identifi ed the following focus areas for the year ending 31 March 2012: King III governance element Principles not fully applied/focus areas 2012 Ethical leadership and corporate citizenship. Boards and directors: composition of the board and performance assessment. Boards and directors: director development. Audit committees: responsibilities of the audit committee. Dispute resolution. Integrated reporting and disclosure. A newly drafted terms of reference for the Social and Ethics Committee ( SEC ) is currently under review. The SEC will ensure that social, ethical, and corporate citizenship matters are formally embedded in the group s operations and decision making. The majority of non-executive directors are currently not considered to be independent. A formal board evaluation, in respect of composition, skills and performance is planned for A formal training and development plan for directors will be implemented during A combined assurance model to ensure a co-ordinated approach to all assurance activities will be developed during A formal dispute resolution process for adoption by the board will be developed during The appropriateness of independent assurance on sustainability reporting and disclosure will be considered during

47 THE BOARD The board is collectively responsible to the group s stakeholders for the long-term success of the group and for the overall strategic direction and control of the group. This responsibility is explicitly assigned to the board in its charter and, to some extent, in the company s memorandum of incorporation ( MOI ). The board exercises this control through the governance framework of the group which includes detailed reporting to the board and its committees, a system of internal controls and has approved a delegation of authority through an approval framework. The board discharges its responsibilities as contained within its charter. SUMMARY OF BOARD CHARTER The main functions of the board covered by the charter are: Determining the overall objectives of the group, developing the strategies to meet those objectives and monitoring performance. Balancing the interests of all stakeholders of the company. Determining and reviewing mandates and terms of reference of board committees. Appointing the CEO and delegating authority. Monitoring performance of the CEO and directors. Approving and reviewing company policies. Approving other major group activities, including staffi ng and remuneration policies, capital funding, the fi nancial statements, acquisitions, sales and capital expenditure in terms of an approval framework approved by the board. Ensuring that a budgeting process exists and measuring actual performance against budgets. Taking ultimate responsibility for the adequacy of operational and fi nancial systems as well as regulatory compliance. Any other non-fi nancial issues that have not specifi cally been mandated to any sub-committee. COMPOSITION AND APPOINTMENT OF DIRECTORS The details of the directors appear on pages 12 to 13 of the integrated report. Directors At the date of this report, the board consists of 10 directors: Chairman AD (Anton) Botha Executive directors G (Gerhard) van Zyl (Chief executive offi cer) MJ (Michael) Potts (Financial director) HC (Ina) Lopion (Executive director: asset management) Non-executive directors HSC (Hendrik) Bester PJ (Peter) Cook JM (Mlungisi) Hlongwane PS (Peter) Moyanga MH (Mervyn) Serebro UJ (Banus) van der Walt Three of the seven non-executive directors have been determined by the board to be independent in accordance with the criteria of the JSE and King III. Messrs Botha, Cook, van der Walt and Hlongwane are not considered independent in accordance with the defi nitions contained in King III. Messrs Botha, Cook and van der Walt hold various directorships within the Sanlam Group, currently the largest linked unitholder in Vukile. Mr Hlongwane holds an indirect interest of 14.6% in Lazarus Capital (Pty) Ltd ( Lazarus Capital ), Vukile s BEE equity partner and currently the second largest linked unitholder in the group. The board currently comprises 20% historically disadvantaged South Africans. In terms of the MOI, one-third of directors must retire at every annual general meeting and are eligible for re-election. Chairman and lead independent director The roles of the chairman and chief executive offi cer are separate and the offi ce of the chairman is occupied by a non-executive director. Since Mr Botha is deemed not independent, due to his directorships held within the Sanlam Group, the board has appointed Mr Bester as lead independent director, in line with the recommendations of King III. Chief executive The board appoints the chief executive offi cer ( CEO ). The appointment is made on the recommendation of the human resources and nomination committee. During the year under review the current CEO, Mr van Zyl, indicated his intention to resign from this position by the earlier of 30 September 2011 or upon the appointment of a new CEO. On receipt of his resignation, the board initiated a process to fi nd a successor for Mr van Zyl and, following the successful conclusion of this process, Laurence Rapp has been appointed as the new CEO effective from 1 August Compulsory retirement age During the year under review, the board extended the compulsory retirement age of non-executive directors from 65 to 70 in line with market practice. INFORMATION AND PROFESSIONAL ADVICE The directors are entitled to seek independent professional advice at the group s expense concerning group affairs and have access to any information they may require in discharging their duties as directors. They also have unrestricted access to the services of the company secretary. GOVERNANCE AND REMUNERATION REPORT 43

48 Corporate governance report (continued) BOARD EVALUATION An independent review of the composition, skills and performance of the board will be conducted during the year ending 31 March DEALING IN GROUP SECURITIES Directors, executives and senior employees are prohibited from dealing in Vukile s securities during certain prescribed restricted periods. A formal securities dealings policy has been developed to ensure directors and employees compliance with the JSE Listing Requirements and the insider trading legislation in terms of the Securities Services Act. DIRECTORS DECLARATIONS AND CONFLICT OF INTERESTS Directors declarations of interests are tabled and circulated at every board meeting. All directors are encouraged to assess any potential confl ict of interest and to bring such circumstances to the attention of the chairman. COMPANY SECRETARY Mr Johann Neethling is the company secretary and took offi ce on 27 July 2010, after the resignation of the previous company secretary. Director induction and training are part of the company secretary s responsibilities. He is responsible to the board for ensuring the proper administration of board proceedings, including the preparation and circulation of board papers, drafting annual work plans, ensuring that feedback is provided to the board and board committees and preparing and circulating minutes of board and board committee meetings. He provides practical support and guidance to the board and directors on their responsibilities within the prevailing regulatory and statutory environment. BOARD MEETING ATTENDANCE The board met seven times during the fi nancial year. Four of these meetings were scheduled in advance and three were to deal with specifi c business. The attendance for each director appears at the bottom of the page. KEY ACTIVITIES OF BOARD IN 2011 During the year, the board performed the following key activities, including the consideration and approval of: The annual fi nancial statements, annual report, group property valuations and fi nal distribution for the year ended 31 March The condensed fi nancial statements, interim results, group property valuations and interim distribution for the six months ended 30 September The property valuation policy and methodology of group. The acquisition of the R541 million property portfolio. The new long term and short term incentive schemes, annual bonuses and salary increases for employees. The critical performance areas ( CPA ) of the Exco members. The information technology governance charter. The Competition Act policy. The re-fi nancing of R462 million securitisation debt. The appointment of a new company secretary. The specifi c course of action in relation to a potential corporate action. Property sales in excess of R10 million. Leases with a value in excess of R15 million. The board further initiated the following processes: A review of the board charter and various board committee terms of references. A review of the group s risk management, compliance policy and dealing in company securities policies. The recruitment of a new CEO. BOARD COMMITTEES AUDIT AND RISK COMMITTEE The report by the audit and risk committee ( AR committee ) is set out on pages 58 to 59 of the integrated report. BOARD MEETING ATTENDANCE (Special) (Special) (Special) 19 May 27 Jul 31 Aug 20 Oct 18 Nov 24 Feb 17 Mar AD Botha HSC Bester PJ Cook JM Hlongwane HC Lopion ^ PS Moyanga MJ Potts ^ MH Serebro UJ van der Walt G van Zyl Indicates attendance. Indicates absence with apology. ^ Certain executive directors recused themselves at request of the chairman. 44

49 INVESTMENT COMMITTEE Current members Mervyn Serebro (Chairman) Hendrik Bester Mlungisi Hlongwane Gerhard van Zyl Michael Potts The investment committee is an important element of the board s system to implement its winnowing strategy through acquisitions, disposals and redevelopment and refurbishments. The committee comprises two executive directors and three non-executive directors, of which two are independent. Summary of terms of reference The investment committee s purpose and function is: To consider recommendations from management for acquisitions, capital expenditure or disposals. To authorise and approve such transactions and capital expenditure as fall within its approval mandate. To make recommendations to the board regarding transactions and capital expenditure that fall outside its approval mandate. Investment committee attendance The committee conducted all of its business on a roundrobin basis during the fi nancial year. Key activities of the investment committee in 2011 During the year the investment committee performed the following key activities: Review and recommendation to the board of the R541 million portfolio acquisition. Approval of the extensions to the Mala Plaza Shopping Centre in Malamulele. Approval of the new Cashbuild outlet and the contribution to the tenant installation cost for Fruit and Veg City at Hillfox Power Centre in Roodepoort. Approval of the purchase of the Giyani Plaza Retail Centre in Giyani. INTERNAL CONTROL It is the board s responsibility to oversee the group s system of internal control and to keep its effectiveness under review. The system is designed to provide reasonable assurance against material misstatement and loss. The system of internal fi nancial control is designed to provide assurances on the maintenance of proper accounting records and the reliability of fi nancial information used within the business and for publication. The internal control system includes a reasonable division of responsibility and the implementation of policies and procedures which are communicated throughout the group. INTERNAL AUDIT The group has outsourced its internal audit function to KPMG. Internal audit is responsible for assisting the board and management in maintaining an effective internal control environment by evaluating those controls continuously to determine whether they are adequately designed, operating effi ciently and effectively and to recommend improvements. EXTERNAL AUDIT Grant Thornton is the external auditor of Vukile and its subsidiaries, including the Namibian subsidiaries. The independence of the external auditor is recognised, and annually reviewed, by the AR committee with the auditors. The external auditors attend all AR committee meetings and have unrestricted access to the chairman of the AR committee. RISK MANAGEMENT REVIEW OUR APPROACH The group has formalised its approach to risk management in a formal policy. The strategic intent of our risk management policy is to create an environment in which risk management is applied at a consistent high level across the group, enabling management to take informed decisions, to achieve business objectives and maximise returns for linked unitholders. Our risk management principles are based on the principles of King III and the Committee of Sponsoring Organisations of the Treadway Commission ( COSO ) Enterprise Risk Management Framework. Our risk management process covers the following components: Business context: considering the internal and external factors driving our business. Internal environment: considering our relevant risk tolerances and appetite for risk. Objective setting: the group s specifi c business objectives. Risk identifi cation: the formal process to identify risks that may impact the objectives. Risk analysis: analysing the key risks in terms of impact and likelihood. Risk treatment: determining whether to treat, terminate, transfer or tolerate risks. Communication of information about key risks, signifi cant risk incidents and emerging risks to the relevant forums. Monitoring: continuously monitoring risks and treatment actions. GOVERNANCE AND REMUNERATION REPORT 45

50 Corporate governance report (continued) OUR KEY RISKS This section identifi es the key risks that may affect the group s fi nances and operations: Key risk identified Potential impact Mitigation strategy Outsourced property management service delivery failures or below standard performance. Energy and infrastructure-related services interruption and cost impact thereof. Inability to obtain, retain and develop a balanced quality management team. Loss of Sanlam asset management contract and right of fi rst refusal due to poor performance. Increasing compliance requirements and cost impact thereof. Refi nancing of maturing debt facilities. Inadequate Black Economic Empowerment (BEE) rating. Operational losses/process failures. Poor tenant service levels. Damaged reputation with tenants and service providers. Power interruption leading to tenant losses. Pressure on capital expenditure due to alternative power supply requirements. Health and safety risks in respect of water supply. Pressure on cost structure due to rising energy cost and rates and taxes. Loss of competitive edge. Operational losses/system failures. Damaged reputation with investment community and potential workforce. Loss of revenue. Loss of deal pipeline. Damaged reputation with investment community. Possible non-compliance with a myriad of legislation and regulations. Pressure on operational cost structure to ensure compliance. Inability to secure adequate facilities timeously. Increased margins and refi nancing costs. Increased cost of capital exceeding acquisition yields. Non-compliance with legislation and industry charter. Inability to secure long-term leases with government. Treat (control) Strict implementation of performance clauses in management agreements. Continuous close monitoring. Treat (control) Supporting SAPOA in liaising with government on these matters. Installation of generators based on tenant demand and profi le. Energy-effi ciency programmes. Treat (control) Implementation of attractive remuneration structure. Creation of a balanced and enjoyable workplace. Launching of the Black Professional Development Programme. Appointment of a new CEO. Treat (control) Strong operational focus. Clear communication with Sanlam. Focused incentives for staff. Treat (control) Interaction with SAPOA on various legal matters. Internal compliance functions and practices. Treat (control) Strong relationships with a diverse range of fi nanciers. Access to both conventional and capital market funding. Timeous refi nancing discussions. Treat (control) Launch of the Black Professional Development Programme. Implementation of projects in line with charters and codes. 46

51 Remuneration report Introduction from the chairman of the human resources and nominations committee Dear linked unitholder I am pleased to introduce Vukile s remuneration report for the year ended 31 March Executive remuneration has become one of most debated topics in business today with shareholders, politicians and the public at large providing their opinions on this matter. Over the course of the year, with the launch of King III, there have been further signifi cant changes to corporate governance requirements in respect of remuneration practices, which the human resources and nominations committee ( HRN committee ) will continue to incorporate in its policy making. GOVERNANCE AND REMUNERATION REPORT The HRN committee believes that remuneration is a key instrument to attract and retain competent and skilful individuals in order to become more competitive and effi cient than our competitors. It is also a tool that will enable us to add more value through people and become an employer of choice. Attracting and retaining employees has become more signifi cant to Vukile with the internalisation of the asset management operations late in 2009 and the acquisition of the asset management business relating to Sanlam s commercial property portfolio early in As a result, the Vukile workforce has more than quadrupled over the past 18 months. In the past year, Vukile has seen the resignation of its CEO, Gerhard van Zyl. Gerhard will leave offi ce at the end of July 2011 and will be replaced by Laurence Rapp as new CEO on 1 August The HRN committee would like to extend its appreciation to Gerhard van Zyl for his leadership, vision and commitment as CEO since the listing of Vukile in 2004 as refl ected in the group s outstanding performance since then. We would also like to thank him for delaying the effective date of his resignation to afford us time to recruit a suitable replacement. We wish him well in his future endeavours. Peter Cook Chairman, human resources and nominations committee Roodepoort 23 May

52 Remuneration report (continued) HUMAN RESOURCES AND NOMINATIONS COMMITTEE CURRENT MEMBERS Peter Cook (Chairman) Anton Botha Mlungisi Hlongwane Banus van der Walt All the members of the committee are non-executive directors. In line with the recommendations of King III, the chief executive offi cer and executives responsible for remuneration matters attend the meetings of the committee on invitation, but may not vote and are requested to leave the meeting before any decisions relating to them are made. SUMMARY OF TERMS OF REFERENCE The terms of reference of the human resources and nominations committee ( HRN committee ) include, inter alia, the following: The determination and review of the group s human resource philosophy and principles. The group s remuneration policy. Performance measurement policy. The recommendation to the board of discretionary bonuses and the annual percentage salary increase of staff and executives. The recommendation to the board on the remuneration of non-executive directors. Recommendations to the board on the appointment of new executive as well as non-executive directors. Succession planning for the chairman and chief executive positions. HRN COMMITTEE ATTENDANCE The committee met four times during the fi nancial year. Three of these meetings were scheduled in advance and one was to deal with specifi c business. The attendance for each director appears at the bottom of the page. KEY ACTIVITIES OF HRN COMMITTEE IN 2011 During the year, the HRN committee performed the following key activities: Reviewing and recommending for approval to the board the new long-term and short-term incentive schemes, annual bonuses and salary increases, and annual directors fees. Assisted the board in the recruitment of a new CEO. REMUNERATION POLICY Our approach to remuneration Vukile is dependent on its people. Future success and achievements will be inextricably linked to the development and retention of appropriately skilled employees. Success in this area will determine whether Vukile will be recognised as an employer of choice. This recognition will depend on creating a culture and working environment that will provide challenging opportunities for all employees. This clearly also requires compensation commensurate with performance and an alignment of employees objectives with those of the group. To meet these challenges, it will be necessary to continuously update and align our remuneration policies and practices due to demands and trends from an ever more challenging and continuously changing business environment. This will require remuneration market benchmarking through reputable human resources consultancies and more emphasis on performance based or linked variable remuneration components and incentives, including short-term and long-term incentive schemes. OUR CORE REMUNERATION PRINCIPLES Vukile remunerates its people based on the following core principles: Attraction and retention Remuneration is a key instrument to attract and retain talent and to leverage and align such talent with the strategic goals of the group. A core aim is to maximise the impact on employee motivation and to infl uence behaviour in desired directions. Pay for performance Performance forms the cornerstone of the remuneration philosophy. All remuneration practices must be structured in such a way that they provide for clear differentiation between individuals with regards to performance. It is expected from management to make a clear and meaningful distinction between high performers, average performers and under performers and to distribute remuneration and incentives accordingly. An aggressive approach to differentiate between the different levels of performance, in order to drive a high performance culture consistently, must be followed. Strong incentives must be created for superior performance. This means that top performers must be awarded higher incentives than other employees. Under performers must not be rewarded and active steps must be taken to either encourage such individuals to improve performance and conform to agreed performance standards or to leave the group, in line with accepted practices. (Special) 19 May 18 Nov 10 Mar 17 Mar HRN committee PJ Cook AD Botha JM Hlongwane UJ van der Walt Indicates attendance. 48

53 Leverage and alignment Reward consequences for individual employees must as far as possible be aligned with, linked to and infl uenced by the group or business strategy; the performance of the group as a whole; employee contribution; and key business results. They may also be modifi ed by performance against group values. Best practice Reward packaging and practices must refl ect best practice but with proper recognition of the peculiarities of the economic and social conditions of the principal market(s) in which the group does business. Consistency Individual pay rates relative to others in the group should be fair, consistent and explainable. No unfair discrimination will be allowed and equal opportunities in respect of service practices and benefi ts will be guaranteed. Differentiation between employees on the grounds of performance is, however, imperative. Competitiveness Remuneration packages must enable the group to attract and retain employees with appropriate relevant specialised skills of the highest quality. Rates of pay must be fair relative to what can be earned in similar organisations (similar size, type and standing) competing in the same market(s). Where possible, the focus will be on the market-relatedness per job or job family. Communication The remuneration philosophy and practices, as well as the process to determine individual pay levels, must be transparent and be communicated to all employees. Remuneration policy and its application must be kept as simple as possible, be readily available, understandable and the relevant components communicated to all that they apply to. The privacy of individuals will, however be respected. Quantum and structure of pay elements The quantum of the different components of the overall remuneration package must be determined as follows: The guaranteed component is based on market benchmarks together with performance, competence and potential. The short-term variable component of remuneration is based exclusively on individual critical performance areas ( CPAs ) and annual performance. The long-term variable component is based on performance, potential, and the individual s overall value to the business. A clear distinction is made between short and long-term incentive instruments and they are kept separate. OUR REMUNERATION COMPONENTS Salary Salary represents the fi xed or guaranteed remuneration component, inclusive of relevant allowances, and contributions to retirement funds. Fixed remuneration is aimed at approximately the market midpoint (the 50th percentile) on average, and a lead-lag strategy relative to the market is followed. Deviations from this principle will be considered and approved by the HRN committee or the chief executive offi cer, as appropriate, to support sound business decisions or specifi c needs, strategies or requirements. Fixed remuneration does take into account the supply and demand of certain skills or candidates for specifi c job categories which may necessitate and dictate the number or extent of the deviations from the market midpoints. Short-term incentive bonus scheme The principles of the short-term bonus scheme ( bonus scheme ) are as follows: Board discretion The board has absolute discretion with regards to the rules of the bonus scheme, the amounts earned, and the participants in the bonus scheme and annual amounts to be awarded. In addition, no bonuses will be paid unless the group has achieved at least its budgeted distribution. Participants in the scheme Senior staff members earning in excess of R per annum participate in the bonus scheme. Staff members earning less than R per annum are paid an annual bonus equal to 15% of their annual cost to group packages, subject to the group achieving its budgeted distribution for the year and subject to the achievement of the staff members of their individual CPA targets. Principle of determination of bonus pool The bonus pool is determined based on growth in relative and actual distributions to linked unitholders. Bonus amount actually paid out The payment of the net bonus amounts as calculated is spread over a two year period with 50% of the calculated bonus paid out in May following the fi nancial year end, and 50% paid out in March of the following year. Long-term retention and incentive scheme The long-term retention and incentive scheme ( LTRI ) was submitted and approved by linked unitholders on 31 August The purpose of the LTRI is to attract, retain, motivate and reward eligible employees who are able to infl uence the performance of the group on a basis that will align their interests with those of the group s linked unitholders. The principles of the LTRI are as follows: The maximum annual amount to be paid by the group in order to implement the scheme will not exceed 0.25% of the average market capitalisation of the group in the year in which the payment is made. GOVERNANCE AND REMUNERATION REPORT 49

54 Remuneration report (continued) The total exposure of any individual in the scheme will not exceed fi ve times his/her annual cost of group package. This maximum exposure will include participation in circumstances where, in the event that the HRN committee is of the opinion that a larger short-term bonus than is allowed in terms of the rules of the bonus scheme is appropriate (only applicable to executive directors and only in exceptional circumstances), the excess portion be incorporated in the scheme as is currently proposed with similar vesting periods, but that only 50% of such excess portion be subject to the achievement of performance goals and CPA targets, as applicable. The maximum exposure that any individual can have in terms of this mechanism will not exceed two times his/her annual cost to group package. The maximum number of linked units that any individual can obtain in terms of the scheme will be If any participant resigns from Vukile prior to the expiry of four years or if the participant s employment is terminated for cause, the participant s proportionate share of the linked units at the time of termination will be sold and the proceeds paid to Vukile. In other circumstances of cessation of employment (disability, ill health, redundancy, retirement or analogous reasons for departure of a good leaver nature) of an employee prior to expiry of the four year period, a proportionate share of the linked units will be released, subject to the pro rata actual achievement of performance goals and/or CPA targets and pro rata to the period to date. Eligible employees whose normal retirement falls within the required vesting period of four years will participate in the scheme, but will, on retirement, be treated as indicated above, i.e. a proportionate share of the linked units will be released, subject to the pro rata actual achievement of performance goals and/ or CPA targets and pro rata to the period to date. If, in the opinion of the HRN committee, early vesting is appropriate or necessary (possibly in the event of death or occasions such as takeover of the group or sale or transfer of the business where awards are not being rolled over into equivalent awards in the successor entity or new employer), awards will vest taking into account the pro rata actual achievement of performance goals and/or CPA targets and pro rata to the period to date. There will be no retesting of performance conditions. The scheme will have a life of seven years (three year period for awards and four years for vesting). All participants will have an exposure to the scheme equivalent to a multiple of one times annual cost to group package that is subject to the achievement of CPA targets (to be defi ned and agreed with the individual participants) as well as, in the case of senior employees and executive directors only, an exposure to the scheme equivalent to a multiple not exceeding two times annual cost to group package that is subject to the achievement of pre-determined group performance measures. The salient features of the scheme are as follows: The HRN committee will, on an annual basis, recommend to the board of directors for fi nal approval the specifi c employees and the magnitude of their participation in the scheme, i.e. the multiple of annual cost to group package per individual. The principle of the scheme is that an amount equivalent to the specifi c multiple of total annual cost to company salary package per participating employee is paid to a service provider who will utilise the amount to acquire Vukile linked units in the market. All distributions paid by the group during the four year period must be utilised by the service provider to purchase additional Vukile linked units in the market. At the expiry of four years after the initial payment has been made to the service provider, the number of linked units acquired by the service provider, after providing for PAYE, are awarded to the participants who are still employees of the group as follows: - The individual s performance relative to his/her CPA targets is measured and the appropriate numbers of linked units, based on a sliding scale, are released after making provision for PAYE tax. The sliding scale is based on the individual s performance relative to his/her CPA targets over the four year period. The sliding scale is structured such that if the individual s relative performance is below 75%, none of the CPA related linked units are released to the participant. If the individual s relative performance is equal to 90%, 70% of the CPA related linked units are awarded to the participant. If the individual s relative performance is 100% or better, 100% of the CPA related linked units are released to the participants. Any linked units not awarded to the participants will be sold and the proceeds paid to the group. - If an individual has also been awarded group performance related linked units, the group s performance relative to pre-determined targets is measured and the appropriate number of linked units, based on a sliding scale, are released after making provision for PAYE tax. The sliding scale is based on the group s performance relative to the PLS sector over the four year period. The relative performance is determined as the increase in distribution of the group, weighted 70%, relative to the increase in distribution of the PLS sector, and the increase in linked unit price of the group, weighted 30%, relative to the increase in the PLS sector index over the four year period. The sliding scale is structured such that if the group s weighted relative performance is below 100%, none of the group performance measure related linked units are released to the participants. If the group s weighted relative performance is equal to 100%, only 25% of the group performance measure related linked units are awarded to the participants. If the group s weighted relative performance is 110% or better, 100% of the group performance measure related linked units are released to the participants. Any linked units not awarded to the participants will be sold and the proceeds paid to the group. 50

55 Annual fi nancial statements ANNUAL FINANCIAL STATEMENTS It is extremely gratifying to report that, despite tough trading conditions, the review period has, once again, been a very good one for the company. 51

56 Directors responsibility statement The annual fi nancial statements set out on pages 54 to 107 of this integrated report are the responsibility of the directors. The directors are responsible for selecting and adopting sound accounting practices, for maintaining an adequate and effective system of accounting records, for the safeguarding of assets, and for developing and maintaining a system of internal controls that, amongst other things, will ensure the preparation of fi nancial statements that achieve fair presentation. After conducting appropriate procedures, the directors are satisfi ed that the group will be a going concern for the foreseeable future and have continued to adopt the going concern basis in preparing the fi nancial statements. The annual fi nancial statements were approved by the directors and are signed on their behalf by: Anton Botha Chairman Gerhard van Zyl Chief executive Roodepoort 23 May 2011 Declaration by the company secretary The company secretary hereby certifi es, in accordance with the Companies Act of South Africa, that all returns and notices required have been fi led with the Registrar of Companies and that all such returns are true and correct. Johann Neethling Company secretary Roodepoort 23 May

57 Report of the independent auditors To the members of Vukile Property Fund Limited We have audited the group annual fi nancial statements and annual fi nancial statements of Vukile Property Fund Limited, which comprise the consolidated and separate statements of fi nancial position as at 31 March 2011, and the consolidated and separate statements of comprehensive income, changes in equity and cash fl ows for the year then ended, and a summary of signifi cant accounting policies and other explanatory notes, and the directors report, as set out on pages 54 to 107. DIRECTORS RESPONSIBILITY FOR THE FINANCIAL STATEMENTS The company s directors are responsible for the preparation and fair presentation of these fi nancial statements in accordance with International Financial Reporting Standards and in the manner required by the Companies Act of South Africa. This responsibility includes: designing, implementing and maintaining internal control relevant to the preparation and fair presentation of fi nancial statements that are free from material misstatement, whether due to fraud or error; selecting and applying appropriate accounting policies; and making accounting estimates that are reasonable in the circumstances. AUDITORS RESPONSIBILITY Our responsibility is to express an opinion on these fi nancial statements based on our audit. We conducted our audit in accordance with International Standards on Auditing. Those standards require that we comply with ethical requirements and plan and perform the audit to obtain reasonable assurance whether the fi nancial statements are free from material misstatement. An audit involves performing procedures to obtain audit evidence about the amounts and disclosures in the fi nancial statements. The procedures selected depend on the auditors judgement, including the assessment of the risks of material misstatement of the fi nancial statements, whether due to fraud or error. In making those risk assessments, the auditor considers internal control relevant to the entity s preparation and fair presentation of the fi nancial statements in order to design audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the entity s internal control. An audit also includes evaluating the appropriateness of accounting policies used and the reasonableness of accounting estimates made by management, as well as evaluating the overall presentation of the fi nancial statements. We believe that the audit evidence we have obtained is suffi cient and appropriate to provide a basis for our audit opinion. OPINION In our opinion, the fi nancial statements present fairly, in all material respects, the consolidated and separate fi nancial position of Vukile Property Fund Limited as at 31 March 2011, and its consolidated and separate fi nancial performance and consolidated and separate cash fl ows for the year then ended in accordance with International Financial Reporting Standards and in the manner required by the Companies Act of South Africa. ANNUAL FINANCIAL STATEMENTS Grant Thornton Chartered Accountants (SA) Registered Auditors per V R de Villiers Chartered Accountant (SA) Registered Auditor 23 May 2011 Grant Thornton Offi ce Park 137 Daisy Street Sandown

58 Directors report OVERVIEW Your directors have pleasure in submitting their seventh directors report, which forms part of the audited annual fi nancial statements of the group and company for the year ended 31 March Vukile was listed on 24 June 2004 with a market capitalisation of approximately R1.3 billion. The company s primary objective was, and still is, to acquire properties with strong contractual cash fl ows in order to achieve meaningful capital appreciation, long-term sustainability and growth in income distributions to its linked unitholders. The company s market capitalisation has increased substantially to R4.99 billion as at 31 March 2011 (R3.97 billion: 2010), representing an annualised increase of 27% per annum from the date of listing. It is pleasing to announce that the group has performed well over the review period and that profi t available for distribution has increased by 26.2% from R323.3 million to R408.1 million for the period ended 31 March SUMMARY OF FINANCIAL PERFORMANCE AND DISTRIBUTIONS The information presented for the 12 months ended 31 March 2011 has been prepared in accordance with International Financial Reporting Standards ( IFRS ) and the group s accounting policies. The presentation of the results also complies with the relevant sections of the South African Companies Act, 1973, as amended and the JSE Listing Requirements. The annual fi nancial statements have been audited by Grant Thornton. The board has approved a fi nal distribution of cents per linked unit for the six months ended 31 March 2011, which brings the total distribution for the year ended 31 March 2011 to cents per linked unit compared to the distribution of cents per linked unit in 2010, an increase of 9.0% for the year and an increase of 10.2% over the comparable six month period. NATURE OF BUSINESS Vukile is a property holding and investment company through the direct and indirect ownership of immovable property. Vukile also provides asset management services in respect of the Sanlam Group s long-term commercial investment property portfolio. The company is listed on the JSE Limited and the NSX in Namibia under the Real Estate sector. CAPITAL STRUCTURE The linked unit structure comprises ordinary shares indivisibly linked to debentures on a one to one basis. Collectively, the linked shares and debentures comprise the linked units which are traded together as indivisible units. The authorised capital comprises ordinary shares with a par value of one cent each. Each linked unit comprises one share of one cent (and a share premium of nine cents) linked to one debenture of 490 cents. Interest payable on one debenture is 499 times greater than the dividend payable per share new linked units were issued on 3 September 2010 to partly fund the R541 million property portfolio acquisition. There were linked units in issue at 31 March MANAGEMENT AND ADMINISTRATION The management of Vukile is responsible for the property asset management functions of the group. Vukile has contracted the following property managers to undertake the day to day management of the group s property portfolio: Gensec Property Services Limited trading as JHI. Kuper Legh Property Management (Pty) Ltd. Hermans and Roman Property Solutions (Pty) Ltd. Old Mutual Investment Group Property Investments (Pty) Ltd. 54

59 SPECIAL RESOLUTIONS No special resolutions were passed during the period under review. SUBSIDIARIES Details of the company s subsidiaries are set out in note 7 to the annual fi nancial statements included in this integrated report. Net profi t after taxation of subsidiaries included in the group is as follows: R MICC Property Income Fund Limited Vukile Investment Properties Securitisation (Pty) Ltd ( VIPS ) DIRECTORS Details of the directors, providing their full names, ages, qualifi cations and a brief curriculum vitae, are set out on pages 12 to 13 of this integrated report. In terms of the articles of association of the company, one third of non-executive directors have to retire annually by rotation. Non-executive directors are obliged to retire at the annual general meeting following their 70th birthday. Any new directors that have been appointed during a year, also have to retire at the next annual general meeting. All retiring directors will subsequently be eligible for re-election. The composition of the board of directors and its subcommittees is detailed in the table below. There have been no changes to directors interests between the end of the fi nancial year and 23 May Mr Jonathan Mlungisi Hlongwane has an effective holding of 1.55% in Vukile through his 50% holding in the Isolenu Group Holdings, which holds 100% interests in Propinvest 10 and Panavest, which hold 31.7% and 5% interests respectively in Buhlobo Properties. Buhlobo Properties has a 40% interest in Lazarus Capital, which, in turn, holds 21.05% of Vukile s linked units. DIRECTORS INTEREST IN MATERIAL CONTRACTS The directors have no interest in material contracts or transactions, other than those directors involved in the operation of the company as set out in this report. There have been no bankruptcies or voluntary arrangements of the above-named persons. The executive directors of Vukile have not acted as directors with an executive function of any company at the time of or within the 12 months preceding any of the following events taking place: receiverships, compulsory liquidations, creditors voluntary liquidations, administrations, company voluntary arrangements or any composition or arrangement with its creditors generally or any class of its creditors. The directors of Vukile have not been the subject of public criticisms by statutory or regulatory authorities (including professional bodies) and have not been disqualifi ed by a court from acting as directors of a company or from acting in the management or conduct of the affairs of any company. There have been no offences involving dishonesty by the directors of Vukile. EXECUTIVE DIRECTORS SERVICE CONTRACTS The executive directors do not have fi xed term contracts with the company. A six months notice period is required by both parties for the termination of services. Details of remuneration and incentive bonuses are set out on the following page. SECRETARY The company secretary is Johann Neethling, 1st Floor, Meersig Building, Constantia Boulevard, Constantia Kloof, 1709 (PO Box 5995, Weltevreden Park, 1715). DISTRIBUTIONS A distribution of cents per linked unit was paid on 21 December The board of directors has declared a fi nal distribution of cents per linked unit for the six months ended 31 March 2011, which brings the total distribution for the year to cents per linked unit (2010: cents), an increase of 9.0% over the previous year. The last day to trade the linked units cum distribution is Thursday 9 June 2011 and trading commences ex distribution on Friday 10 June The record date to participate in the distribution is Friday 17 June Payment of the distribution will be made to linked unitholders on Monday 20 June In respect of dematerialised unitholders, the distribution will be transferred to the Central Securities Depositary Participant or Brokers account on Monday 20 June Certifi cated unitholders distributions will be mailed on or about Monday 20 June ANNUAL FINANCIAL STATEMENTS BOARD OF DIRECTORS Human re- Date Audit sources and of and risk nomination Investment Composition of board appointment committee committee committee Non-executive directors Anton Dirk Botha (Chairman) 17 May 2004 Member Hendrik Schalk Conradie Bester ~ * 17 May 2004 Chairman Member Peter John Cook 17 May 2004 Member Chairman Peter Sipho Moyanga ~ 17 May 2004 Member Mervyn Hymie Serebro ~ 17 May 2004 Member Chairman Jonathan Mlungisi Hlongwane 29 May 2006 Member Member Urbanus Johannes van der Walt** 6 Sept 2007 Member Executive directors Gerhard van Zyl (CEO) 24 Apr 2004 Member Michael John Potts (FD) 17 May 2004 Member Hermina Christina Lopion 1 Jan 2010 * Appointed as lead independent director on 18 March ** Appointed as member of the human resources and nomination committee on 16 March ~ Independent. 55

60 Directors report (continued) DIRECTORS REMUNERATION Total Total Short- remu- remu- Directors term neration neration Rand fees Salary bonus Non-executive directors AD Botha HSC Bester PJ Cook PS Moyanga MH Serebro JM Hlongwane UJ van der Walt Executive directors G van Zyl (CEO) MJ Potts (FD) HC Lopion (Executive director: asset management) a * Other senior executives^ F Rootman (Asset manager) * JJ Ferreira (Asset manager) ~ NJ Els (Senior manager: acquisitions and sales) ~ ^ Disclosure in terms of principle 2.26 of King III. * Individual was employed for three months of the fi nancial year. ~ Individual was employed for six months of the fi nancial year. Individuals that joined Vukile, as a result of the asset management internalisation and the acquisition of the Sanlam asset management business, started participating in the Vukile group s short-term bonus scheme as from 1 July a The amount includes company contributions to the MICC pension fund equal to 20% of the pensionable portion of total cost-tocompany. DIRECTORS INTERESTS IN LINKED UNITS Indirect Direct Indirect non- Linked units beneficial beneficial beneficial Total Non-executive directors HSC Bester MH Serebro UJ van der Walt Executive directors G van Zyl (CEO) MJ Potts (FD) HC Lopion

61 MOVEMENT OF DIRECTORS INTERESTS IN LINKED UNITS Acquired Disposed of Held at Held at during during the 31 March Linked units 1 April 2010 the period period 2011 Non-executive directors HSC Bester MH Serebro UJ van der Walt Executive directors G van Zyl (CEO) MJ Potts (FD) HC Lopion * Number of linked units ANNUAL FINANCIAL STATEMENTS * Not on share register as Sanlam Capital Markets (Pty) Ltd ( SCM ) still has to transfer these shares into HC Lopion s private account. CONDITIONAL INDIRECT BENEFICIAL DIRECTORS INTERESTS In terms of the company s long-term share based incentive scheme, linked units in Vukile have been acquired by SCM as outlined below. The potential, conditional indirect benefi cial interests of Vukile s executive directors in the abovementioned incentive scheme are summarised as follows: Vukile units G van Zyl MJ Potts HC Lopion Summary of units held by SCM Balance at 1 April Acquisition utilising cash paid to SCM (1) Acquisitions utilising cash from distributions Adjustments (3 557) (1 565) Units vested ( ) ( ) Less: Units forfeited through resignation (as approved by the human resources and nomination committee) to be sold ( ) Balance at 31 March R000 R000 R000 Distributions not yet utilised to acquire additional linked units (cash) (2) (1) units acquired by SCM by virtue of the take-over of the asset management business from Sanlam Properties (Pty) Ltd. Sanlam shares previously held by HC Lopion were sold and the cash proceeds paid to Vukile to settle the acquisition of the abovementioned Vukile units units were acquired by SCM in terms of the fi rst allocation of units to HC Lopion in terms of the new long-term retention and incentive scheme, details of which are set out on pages 49 to 50. (2) As Vukile has been and still is in a closed period, no linked units in Vukile have been acquired with the available cash. No changes in directors interests have occurred between 31 March 2011 and 23 May

62 Report of the audit and risk committee for the year ended 31 March 2011 The audit and risk committee ( AR committee ) is a committee of the board of directors which, in addition to having specifi c statutory responsibilities to the shareholders in terms of the Companies Act, assists the board through advising and making submissions on fi nancial reporting, oversight of the risk management process and internal fi nancial controls, external and internal audit functions and statutory and regulatory compliance of the company. TERMS OF REFERENCE The AR committee has adopted formal terms of reference. Management is currently fi nalising a review of the terms of reference to ensure alignment with the principles of King III. COMPOSITION The committee consists of four non-executive directors, of which three are independent. At 31 March 2011 the AR committee comprised of the following directors: Director Period served HSC Bester (Chairman) 17 May current PJ Cook 17 May current PS Moyanga 24 May current MH Serebro 17 May current The chief executive offi cer, the fi nance director, senior fi nancial executives of the group and representatives from the external and internal auditors attend the committee meetings by invitation only. The internal and external auditors have unrestricted access to the AR committee. MEETINGS The AR committee held three meetings during the period. All these meeting were scheduled in advance. The attendance for each director was as follows: 12 May 10 Nov 10 Mar Director HSC Bester (Chairman) PJ Cook PS Moyanga MH Serebro Indicates attendance. 58

63 STATUTORY DUTIES In the execution of its statutory duties during the past fi nancial year, the AR committee: Nominated for appointment as auditor, Grant Thornton who, in our opinion, is independent of the company. Determined the fees to be paid to Grant Thornton as disclosed in note 26. Determined Grant Thornton s terms of engagement. Developed and implemented a policy setting out the categories of non-audit services that the external auditors may and may not provide, split between permitted, permissible and prohibited services. Pre-approved all non-audit service contracts with Grant Thornton. Received no complaints relating to the accounting practices and internal audit of the company, the content or auditing of its fi nancial statements, the internal fi nancial controls of the company, and any other related matters. Made submissions to the board on matters concerning the company s accounting policies, fi nancial control, records and reporting. Recommended for approval the annual fi nancial statements, integrated annual report, group property valuations and fi nal distribution for the year ended 31 March Recommended for approval the fi nancial statements, interim results, group property valuations and interim distribution for the six months ended 30 September DELEGATED DUTIES In addition to its statutory duties, the AR committee also performed the following duties: Overseeing the risk management and internal audit functions. Reviewed and approved the key risks facing the group. Assisted the board in its review of the group s risk management and compliance polices. Reviewed the expertise and experience of the fi nancial director. REGULATORY COMPLIANCE The AR committee has complied with all applicable legal and regulatory responsibilities. EXTERNAL AUDIT Based on processes followed and assurances received, nothing has come to our attention with regards to the external auditor s independence. Details of the external auditor s fees are set out in note 26. Based on our satisfaction with the results of the activities outlined above, we have recommended to the board that Grant Thornton should be reappointed for the fi nancial year ending 31 March FINANCE FUNCTION We believe that Mr Michael John Potts, the group fi nancial director, possesses the appropriate expertise and experience to meet his responsibilities in that position as required by the JSE Limited. We are satisfi ed with the: expertise and adequacy of resources within the fi nance function, and the experience of the senior fi nancial management staff. In making these assessments, we have obtained feedback from both external and internal audit. Based on the processes and assurances obtained, we believe that the accounting practices are effective. INTEGRATED REPORT Based on processes and assurances obtained, we have recommended the integrated report to the board for approval. On behalf of the audit committee Hendrik Schalk Conradie Bester Chairman of the audit and risk committee Roodepoort 23 May 2011 ANNUAL FINANCIAL STATEMENTS 59

64 Statements of fi nancial position at 31 March Group Company Group Company Note R000 R000 R000 R000 ASSETS Non-current assets Investment properties Investment properties Straight-line rental income adjustment 4 (99 153) (79 795) (85 715) (65 804) Other non-current assets Intangible asset Straight-line rental income asset Development expenditure Furniture, fi ttings and computer equipment Investment in subsidiaries Available-for-sale fi nancial asset Financial asset at amortised cost Goodwill Derivative fi nancial instruments Current assets Trade and other receivables Loan to subsidiary Taxation 6 Debenture interest receivable Cash and cash equivalents Non-current assets held for sale Investment properties Investment properties Straight-line rental income adjustment 4 (1 280) (991) (350) (350) Straight-line rental income asset Total assets EQUITY AND LIABILITIES Equity attributable to owners of the parent Share capital Share premium Reserves Non-current liabilities Linked debentures and premium Other interest bearing borrowings Derivative fi nancial instruments Deferred taxation liabilities Current liabilities Trade and other payables Short-term borrowings Amounts owing to subsidiaries Current taxation liabilities Linked unitholders for distribution Total equity and liabilities

65 Income statements for the year ended 31 March Group Company Group Company Note R000 R000 R000 R000 Property revenue Straight-line rental income accrual Gross property revenue Property expenses 23 ( ) ( ) ( ) ( ) Net profit from property operations Income from asset management business 22, Expenditure - asset management business 24 (20 233) (12 844) (7 141) (3 168) Corporate administrative expenses 25 (25 509) (25 456) (23 781) (23 118) Investment and other income Operating profit before finance costs Finance costs 28 ( ) ( ) ( ) ( ) Profit before debenture interest Debenture interest ( ) ( ) ( ) ( ) Profit before capital items (Loss)/profi t on sale of investment properties (14 798) (17 219) Amortisation of debenture premium Goodwill written-off on sale of properties by subsidiary 10 (5 192) Impairment of intangible asset 5 (49 935) (49 935) (Loss)/profit before fair value adjustments (42 484) (45 303) Fair value adjustments (11 316) Gross change in fair value of investment properties Straight-line rental income adjustment 4 (14 368) (14 632) (7 041) (4 488) Net profit/(loss) before taxation (56 619) Taxation 29 (25 488) (79 081) (46 139) Net profit/(loss) for the year (54 134) ANNUAL FINANCIAL STATEMENTS Earnings per linked unit (cents) Diluted earnings per linked unit (cents)

66 Statements of comprehensive income for the year ended 31 March Group Company Group Company R000 R000 R000 R000 Profit/(loss) for the year (54 134) Other comprehensive income Cash fl ow hedges (11 436) (266) Current period (losses)/profi t (16 616) 667 (22 390) (1 149) Reclassifi cation to profi t or loss Available-for-sale fi nancial assets current period losses (3 556) (1 731) (6 486) (5 980) Other comprehensive income/(loss) for the year (17 922) (6 246) Total comprehensive income/(loss) for the year (53 919)

67 Distribution statements for the year ended 31 March 2011 FIRST SECOND Total Cents per Cents per R000 R000 linked unit R000 linked unit Distribution to Vukile unitholders for the year ended 31 March 2011 Interest distribution Dividend distribution Total distribution ANNUAL FINANCIAL STATEMENTS R000 Distribution in respect of new units issued for period 3 September 2010 to 31 March Distribution to other unitholders Total distribution for the year ended 31 March FIRST SECOND Total Cents per Cents per R000 R000 linked unit R000 linked unit Distribution to Vukile unitholders for the year ended 31 March 2010 Interest distribution Dividend distribution Total distribution (1) (1) Adjusted for the reduced distribution in respect of the linked units to Sanlam Properties (Pty) Ltd as follows: R000 Distribution for period 1 January 2010 to 31 March Less: Distribution foregone in terms of sale of business agreement Distribution attributable to Sanlam Properties (Pty) Ltd 983 Distribution attributable to other unitholders Total distributions for the year ended 31 March Total number of linked units in issue at 31 March Weighted average number of linked units in issue

68 Statements of changes in equity for the year ended 31 March 2011 Revaluation of Non- availabledistribu- for-sale Cash- Share Share table financial flow Retained R000 capital premium reserves assets hedges earnings Total GROUP Balance at 31 March (9 788) (16 854) Issue of share capital Dividend distribution (651) (651) (9 788) (16 854) Profi t for the year Change in fair value of investment properties ( ) Deferred taxation on change in fair value of investment properties and straight-line rental accrual (72 201) Share-based remuneration Transfer to non-distributable reserve (1 387) Other comprehensive income Revaluation of available-for-sale fi nancial asset (6 486) (6 486) Revaluation of cash fl ow hedges (11 436) (11 436) Balance at 31 March (16 274) (28 290) Issue of share capital Dividend distribution (824) (824) (16 274) (28 290) Profi t for the year Change in fair value of investment properties (92 862) Deferred taxation on change in fair value of investment properties and straight-line rental accrual (11 958) Share-based remuneration Transfer to non-distributable reserve (77 054) Other comprehensive income Revaluation of available-for-sale fi nancial asset (3 556) (3 556) Revaluation of cash fl ow hedges Balance at 31 March (19 830) (22 228) COMPANY Balance at 31 March (9 788) (883) Issue of share capital Dividend distribution (651) (651) Net profi t for the year Change in fair value of investment properties ( ) Deferred taxation on change in fair value of investment properties and straight-line rental accrual (46 425) Share based remuneration Other comprehensive income Revaluation of available-for-sale fi nancial asset (5 980) (5 980) Revaluation of cash fl ow hedges (266) (266) Balance at 31 March (15 768) (1 149) Issue of share capital Dividend distribution (824) (824) (15 768) (1 149) Loss for the year (54 134) (54 134) Change in fair value of investment properties (3 316) Deferred taxation on change in fair value of investment properties and straight-line rental accrual (11 150) Share-based remuneration Transfer from non-distributable reserves (72 359) Other comprehensive income Revaluation of available-for-sale fi nancial asset (1 731) (1 731) Revaluation of cash fl ow hedges Balance at 31 March (17 499)

69 Statements of cash fl ow for the year ended 31 March Group Company Group Company Note R000 R000 R000 R000 Cash flow from operating activities Profi t/(loss) before taxation (56 619) Adjustments Net changes in working capital (12 933) (4 020) (16 096) Less: Net current assets acquired through business combination 2 2 Taxation (paid)/refunded 31.3 (10 522) (3 788) (6 581) 697 ANNUAL FINANCIAL STATEMENTS Cash flow from investing activities ( ) ( ) ( ) ( ) Acquisition of business combination ( ) ( ) Acquisition of and improvements to investment properties ( ) ( ) (59 413) (41 210) Acquisition of furniture, fi ttings and computer equipment (799) (11) (417) (9) Net movement of available-for-sale fi nancial asset (164) (5 121) (5 121) Proceeds on sale of investment property Proceeds on sale of furniture, fi ttings and equipment Investment and other income Acquisition of fi nancial asset (5 450) (5 450) Cash flow from financing activities (75 644) ( ) Proceeds from interest bearing borrowings advanced Proceeds from issue of share capital Finance costs ( ) ( ) ( ) ( ) Distributions paid 31.4 ( ) ( ) ( ) ( ) Loan to subsidiary (50 737) Loans from subsidiary repaid (8 700) Net increase in cash and cash equivalents Cash and cash equivalents at the beginning of the year Cash and cash equivalents at the end of the year

70 Notes to the annual fi nancial statements at 31 March ACCOUNTING POLICIES The annual fi nancial statements have been prepared in accordance with International Financial Reporting Standards, AC 500 standards as issued by the Accounting Practices Board, or its successor, the JSE Limited Listings Requirements and the Companies Act of South Africa, 1973, as amended. 1.1 BASIS OF PREPARATION The annual fi nancial statements have been prepared on the historical cost basis, except for the measurement of investment properties and certain fi nancial instruments at fair value and incorporate the principal accounting policies set out below. These accounting policies have been applied consistently with the previous year. 1.2 INVESTMENT PROPERTIES Investment properties, which are stated at fair market value, constitute land and buildings held by the group for rental producing purposes until or unless a property is no longer considered a core property and does not meet strategic requirements. At that stage a sale of the property will be approved and the property will be transferred to non-current assets held for sale. Investment property is initially recorded at cost which includes transaction costs directly attributable to the acquisition thereof. The directors value all the properties bi-annually to fair market value. At least 50% of all properties are valued every six months on a rotational basis by qualifi ed independent external property valuers and any differences between the respective valuations are reported in the notes to the fi nancial statements. Costs include costs incurred initially and costs incurred subsequently to add to, or to replace a part of a property. Tenant installation costs are capitalised to the cost of a building. All these items are included in the fair value of investment properties. If a replacement part is recognised in the carrying amount of the investment property, the carrying amount of the replaced part is derecognised. Fair market value is the open market value, which, in the opinion of the directors, is the fair market price at which the property would have been sold unconditionally on a willing buyer-willing seller basis for a cash consideration on the date of the valuation. Gains and losses arising from changes in the fair value of investment properties are recognised in net profi t and loss for the period in which they arise. Such gains or losses are excluded from the calculation of distributable earnings. Gains or losses on the disposal of investment properties are recognised in net profi t or loss, and are calculated as the difference between the net selling price and the fair value of the property as valued in the most recent annual fi nancial statements. Such gains or losses are excluded from the calculation of distributable earnings. 1.3 DEVELOPMENT EXPENDITURE Expenditure incurred on a grass roots property development is measured initially at cost. Once the development is completed the property is stated at fair market value. If a decision is taken not to proceed with the development the costs incurred to the date of that decision are expensed through the income statement. 1.4 TAXATION The charge for current taxation is based on the results for the year as adjusted for items which are non-assessable or disallowable and any adjustment for tax payable or receivable for previous years. Current tax liabilities (assets) for the current and prior periods are measured at the amount expected to be paid to (recovered from) the taxation authorities, using the tax rates and tax laws that have been enacted or substantively enacted by the reporting date. Temporary differences are differences between the carrying amounts of assets and liabilities for fi nancial reporting purposes and their tax base. The amount of deferred tax provided is based on the tax rates and tax laws in the expected manner of realisation or settlement of the carrying amount of assets and liabilities that have been enacted by the reporting date. A deferred tax liability is recognised for all taxable temporary differences, except to the extent that the deferred tax liability arises from: (a) the initial recognition of goodwill; or (b) goodwill for which amortisation is not deductible for tax purposes; or (c) the initial recognition of an asset or liability in a transaction which: (i) is not a business combination; and (ii) at the time of the transaction, affects neither accounting profi t nor taxable profi t (tax loss). A deferred tax asset is recognised for all deductible temporary differences to the extent that it is probable that taxable profi t will be available against which the deductible temporary difference can be utilised, unless the deferred tax asset arises from the initial recognition of an asset or liability in a transaction that: (a) is not a business combination; and (b) at the time of the transaction, affects neither accounting profi t nor taxable profi t (tax loss). The effect on deferred tax of any changes in tax rates is recognised in the income statement, except to the extent that it relates to items previously charged or credited directly to other comprehensive income or equity. Deferred tax assets are offset against deferred tax liabilities. 66

71 A deferred tax asset is recognised to the extent that it is probable that future taxable profi ts will be available, against which the associated unused tax losses and deductible temporary differences can be utilised. Deferred tax assets are reduced to the extent that it is no longer probable that the related tax benefi t will be realised. 1.5 FINANCIAL INSTRUMENTS Financial assets and fi nancial liabilities are recognised in the statement of fi nancial position when a company has become party to the contractual provisions of the instrument. Financial assets (excluding derivative instruments) The group s principal fi nancial assets are trade receivables, cash and cash equivalents, reimbursement rights, fi nancial assets at amortised cost and loans to subsidiaries. These fi nancial assets are initially measured at fair value. Loans and receivables are subsequently measured at amortised cost. Other fi nancial assets are subsequently measured at fair value. Financial liabilities (excluding derivative instruments) The group s principal fi nancial liabilities are debentures, interest bearing bank loans, trade and other payables and other non-interest bearing borrowings. Interest bearing bank loans and overdrafts are initially recorded at the proceeds received net of direct issue costs. Interest bearing bank loans, debentures and trade and other payables are subsequently measured at amortised cost. Gains and losses on subsequent measurement Gains and losses arising from a change in the fair value of the fi nancial instruments, excluding available-for-sale fi nancial assets, are included in net profi t or loss in the period in which the change arises. Such gains and losses are excluded from the calculation of distributable earnings. Gains and losses arising from a change in the fair value of available-for-sale fi nancial assets are included in other comprehensive income in the period in which the change arises. Derivative instruments The group uses derivative fi nancial instruments including interest rate swaps, swaptions, forward rate agreements and interest rate caps to hedge its exposure to interest rates. It is the policy of the group not to trade in derivative fi nancial instruments for speculative purposes. Derivative fi nancial instruments are initially and subsequently recognised at fair value. In terms of hedge accounting, hedges are either (a) fair value hedges, which hedge the exposure to changes in the fair value of a recognised asset or liability or (b) cash fl ow hedges, which hedge exposure to variability in cash fl ows. In the case of fair value hedges, any gains or losses from changes in the fair value of the hedging instrument are recognised immediately in the profi t or loss for the period. Gains and losses on the effective portion of cash fl ow hedging instruments in respect of forecast transactions are recognised directly in other comprehensive income. Any ineffective portion of a cash fl ow hedge is recognised in profi t or loss for the period. At the time the hedged item affects profi t or loss, any gain or loss previously recognised in other comprehensive income is reclassifi ed from equity to profi t or loss and presented as a reclassifi cation adjustment within other comprehensive income. However, if a nonfi nancial asset or liability is recognised as a result of the hedged transaction, the gains and losses previously recognised in other comprehensive income are included in the initial measurement of the hedged item. 1.6 EQUITY AND RESERVES Share capital represents the nominal value of shares that have been issued. Share premium includes any premiums received on issue of share capital. Any transaction costs associated with the issuing of shares are deducted from share premium, net of any related income tax benefi ts. The revaluation reserve within equity comprises gains and losses due to the revaluation of investment property. Gains and losses on certain fi nancial instruments are included in reserves for available-for-sale fi nancial assets and cash-fl ow hedges respectively. Retained earnings include all current and prior period retained profi ts. 1.7 PROVISIONS Provisions are recognised when the group has a present legal or constructive obligation as a result of past events, for which it is probable that an outfl ow of economic benefi ts will occur. ANNUAL FINANCIAL STATEMENTS 67

72 Notes to the annual fi nancial statements (continued) 1.8 REVENUE RECOGNITION Revenue comprises operating lease income, operating expense recoveries charged to tenants and interest income. Dividends are recognised when the company s right to receive payment is established. Operating lease income and recoveries are recognised as income on a straight-line basis over the lease term. Interest is brought to account using the effective interest method. Contingent rents (turnover rental) are included in revenue when the amounts can be reliably measured. The asset management business generates revenue from the rendering of services, namely asset management income, sales commission earned on the sales of properties on behalf of the Sanlam Group and other service related income. Asset management fees are measured by reference to the fair value of consideration received for services rendered. Sales commission is recognised when all the suspensive conditions pertaining to a property sale agreement have been fulfi lled. 1.9 LETTING COMMISSIONS Letting commissions are capitalised and amortised over the lease period. The carrying value is included with investment properties CASH AND CASH EQUIVALENTS For the purpose of the statement of cash fl ows, cash and cash equivalents comprise cash on hand, deposits held at call with banks and investments in money market instruments, net of bank overdrafts, all of which are available for use by the group BASIS OF CONSOLIDATION The group annual fi nancial statements include the fi nancial statements of the company and its subsidiaries. The operating results of the subsidiaries are included from the effective dates of acquisition up to the effective dates of disposal. Inter-company balances and transactions are eliminated. Subsidiaries apply the same accounting policies as those used by the company. Investment in subsidiaries is carried at cost in the company s fi nancial statements, less any accumulated impairment GOODWILL Goodwill arising on consolidation represents the excess of the cost of acquisition over the group s interest in the fair value of the identifi able assets, liabilities and contingent liabilities of a subsidiary, at the date of acquisition. Goodwill is recognised as an asset at the carrying amount less any accumulated impairment. Goodwill is evaluated annually for impairment. Negative goodwill is recognised in profi t or loss immediately INTANGIBLE ASSETS Intangible assets with an indefi nite useful life are stated at cost less accumulated impairment losses. Intangible assets are tested for impairment annually by comparing their recoverable amount with their carrying amount. Useful life is reviewed in each period to determine whether events and circumstances continue to support an indefi nite useful life assessment. If they do not, the change in useful life assessment from indefi nite to fi nite is accounted for as a change in estimate IMPAIRMENT LOSSES At each reporting date the carrying amounts of the tangible and intangible assets are assessed to determine whether there is any indication that those assets may have suffered an impairment loss. If any such indication exists, the recoverable amount of the asset is estimated in order to determine the extent of the impairment loss. Irrespective of whether there is an indication of impairment, the group also: Tests intangible assets with an indefi nite life for impairment annually by comparing the carrying amount with the recoverable amount. Tests goodwill acquired in a business combination for impairment annually by comparing its carrying amount with its recoverable amount. Where it is not possible to estimate the recoverable amount of an individual asset, the recoverable amount of the cash-generating unit to which the asset belongs is estimated. Value in use, included in the calculation of the recoverable amount, is estimated taking into account future cash fl ows, forecast market conditions and the expected lives of the assets. If the recoverable amount of an asset (or cashgenerating unit) is estimated to be less than its carrying amount, its carrying amount is reduced to the recoverable amount. The impairment loss is fi rst allocated to goodwill and then to the other assets of the cash generating unit. Subsequent to the recognition of an impairment loss, the depreciation or amortisation charge for assets is adjusted to allocate the remaining carrying value, less any residual value, over the remaining useful life. Impairment losses are recognised in profi t and loss. 68

73 If any impairment loss subsequently reverses, the carrying amount of the asset (or cashgenerating unit) is increased to the revised estimate of its recoverable amount but limited to the carrying amount that would have been determined had no impairment loss been recognised in prior years. A reversal of an impairment loss is recognised in profi t or loss. For the purpose of impairment testing, goodwill is allocated to each of the cash-generating units expected to benefi t from the synergies of the combination. No goodwill impairment losses are subsequently reversed. The attributable amount of goodwill is included in the profi t or loss on disposal when the relevant business is sold FURNITURE, FITTINGS AND COMPUTER EQUIPMENT Furniture, fi ttings and computer equipment are stated at cost less accumulated depreciation and any impairment losses. Depreciation is charged so as to write-off the cost less residual value of assets over their estimated useful lives, using the straight-line basis. The principal useful lives used for this purpose are: Computer equipment 3 years Computer software 2 years Furniture and equipment 6 years The residual value and useful life of an asset are reviewed at each fi nancial year end BORROWING COSTS Borrowing costs directly attributable to the acquisition, construction or production of qualifying assets, which are assets that necessarily take a substantial period of time to get ready for their intended use or sale, are added to the cost of those assets. Capitalisation of such borrowing costs ceases when the assets are substantially ready for their intended use or sale. Investment income earned on the temporary investment of specifi c borrowings pending their expenditure on qualifying assets is deducted from the borrowing costs capitalised. Other borrowing costs are expensed in the period in which they are incurred SHARE-BASED PAYMENTS Services received or acquired in a sharebased payment transaction are recognised as the services are received. A corresponding increase in equity is recognised if the services were received in an equity-settled share-based payment transaction or a liability if the services were acquired in a cash-settled share-based payment transaction. For equity-settled share-based payment transactions, the goods or services received, and the corresponding increase in equity, are measured directly at the fair value of the goods or services received, unless that fair value cannot be estimated reliably. If the fair value of the goods or services received cannot be estimated reliably, their value and the corresponding increase in equity are measured indirectly by reference to the fair value, at grant date, of the equity instruments granted. When the services received or acquired in a share-based payment transaction do not qualify for recognition as assets, they are recognised as expenses. For cash-settled share-based payment transactions, the services acquired and the liability incurred are measured at the fair value of the liability. Until the liability is settled, the fair value of the liability is re-measured at each reporting date and at the date of settlement, with any changes in fair value recognised in profi t or loss for the period. If the share-based payments granted do not vest until the counterparty completes a specifi ed period of service, Vukile accounts for those services on a straight-line basis over the vesting period. If the share-based payments vest immediately, the services received are recognised immediately in full NON-CURRENT ASSETS HELD FOR SALE Non-current assets held for sale are assets that will be recovered principally through a sale transaction. These assets are measured at the lower of their carrying amounts and fair value less costs to sell OPERATING SEGMENTS In identifying its operating segments, management reviews the performance of its asset management business and its investment properties held by the group on an individual basis. The measurement policies the group uses for segment reporting under IFRS 8 are the same as those used in its fi nancial statements, except that the following items inter alia are not included in arriving at operating profi t of the operating segments: Corporate administrative expenditure. Investment and other income. ANNUAL FINANCIAL STATEMENTS 69

74 Notes to the annual fi nancial statements (continued) 1.20 REVISED INTERNATIONAL FINANCIAL REPORTING STANDARDS NOT YET ADOPTED The following revisions to International Accounting Standards, relevant to the group, have not been adopted. Effective for accounting periods beginning Statement on or after Summary of key points Impact on Vukile IAS 27 Consolidated and Separate Financial Statements. 1 July 2010 Amends the transition requirements to apply certain consequential amendments arising from the 2008 IAS 27 amendments prospectively, to be consistent with the related IAS 27 transition requirements effective for year ending 31 March No material impact for Vukile expected. IFRS 3 Business Combinations. 1 July 2010 Clarifi es that contingent consideration balances arising from business combinations that occurred before an entity s date of adoption of IFRS 3 (Revised 2008) shall not be adjusted on the adoption date. Also provides guidance on the subsequent accounting for such contingent consideration balance. The choice of measuring a Non-Controlling Interest ( NCI ) either at fair value or at the proportionate share in the recognised amounts of an acquirer s identifi able net assets, is now limited to NCI that are present ownership instruments and entitle their holders to a proportionate share of the acquiree s net asset in the event of liquidation. Clarifi es that all other components of NCI shall be measured at their acquisition-date fair values, unless another measurement basis is required by IFRS. No material impact for Vukile expected. 70

75 Effective for accounting periods beginning Statement on or after Summary of key points Impact on Vukile ANNUAL FINANCIAL STATEMENTS IFRS 3 Business Combinations (continued) Clarifi es the guidance for the accounting of share-based payment transactions of the acquiree that were voluntarily replaced by the acquirer and acquiree awards that the acquirer chooses not to replace. IFRS 3 will become effective for the year ending 31 March IFRS 7 Financial Instruments: Disclosures. 1 January 2011 Clarifi es the disclosure requirements of the standard to remove inconsistencies, duplicative disclosure requirements and specifi c disclosures that may be misleading effective for the year ending 31 March No material impact for Vukile expected. IFRS 9 Financial Instruments. 1 January 2013 IFRS 9 Financial Instruments was issued in November 2009 and amended in October The standard introduces new requirements for the classifi cation and measurement of fi nancial assets and fi nancial liabilities effective for the year ending 31 March Management have yet to assess the impact that this new and amended standard is likely to have on the fi nancial statements of the group. IFRS 9 can be early adopted with transitional provisions that does not require the restatement of comparatives (the transitional provisions will be effective for the 2011 or 2012 fi nancial year ends only). If IFRS 9 is not early adopted, the statement requires restatement of comparatives which will result in presentation of a third column in the statement of fi nancial position. Management has elected not to early adopt the standard for the March 2011 fi nancial year end. 71

76 Notes to the annual fi nancial statements (continued) 1.20 REVISED INTERNATIONAL FINANCIAL REPORTING STANDARDS NOT YET ADOPTED (continued) Effective for accounting periods beginning Statement on or after Summary of key points Impact on Vukile IAS 34 Interim Financial Reporting. 1 January 2011 Aims to improve interim fi nancial reporting by clarifying disclosures required, including the interaction with recent improvements to the requirements of IFRS 7 Financial Instruments: Disclosures. No material impact for Vukile expected. IAS 24 Related party disclosure. 1 January 2011 The IASB has amended the defi nition of a related party to clarify the intended meaning and remove some inconsistencies. For example, the revised Standard makes it explicitly clear that, in the defi nition of a related party, an associate includes subsidiaries of the associate and a joint venture includes subsidiaries of the joint venture. No material impact for Vukile expected. IAS 12 Deferred Taxation. Effective for accounting periods beginning on or after 1 January The amendment to the standard is relevant only when the entity elects to use the fair value model for measurement in IAS 40 Investment Property. The amendments introduce a rebuttable presumption that in such circumstances, an investment property is recovered entirely through sale. The presumption is rebutted if the investment property is held within a business model whose objective is to consume substantially all of the economic benefi ts embodied in the investment property over time, rather than sale. Management has elected not to early adopt the standard for the March 2011 fi nancial year end. Management needs to assess the impact of this statement as it will have a material effect on the fi nancial statements when adopted. 72

77 Effective for accounting periods beginning Statement on or after Summary of key points Impact on Vukile ANNUAL FINANCIAL STATEMENTS IAS 12 Deferred Taxation (continued) Previously, a blended rate was utilised to calculate the deferred tax; going forward the CGT rate will be consistently applied. Amendments to IAS 12 must be adopted for the fi rst time for the group s interim reporting period ending 30 September Early adoption is permissible. The amendment constitutes a change in accounting policy and must be retrospectively applied. A third column statement of comprehensive income and a statement of fi nancial position will be required on adoption. 73

78 Notes to the annual fi nancial statements (continued) 2 KEY ESTIMATIONS AND UNCERTAINTIES Estimates and assumptions are an integral part of fi nancial reporting and as such have an impact on the amounts reported in the group s income, expenses, assets and liabilities. Judgement in these areas is based on historical experience and reasonable expectations relating to future events. Information on the key estimations and uncertainties that have had the most signifi cant effect on the amounts recognised in the fi nancial statements are set out in the following notes in the fi nancial statements: Accounting policies notes 1.2, 1.4, 1.5, 1.7, 1.8, 1.12, 1.13, 1.14, 1.16 and Investment property valuation note 3. Deferred taxation note 19. Trade and other receivables note 12. Goodwill note 1.12 and 10. Intangible assets note 1.13 and 5. Available-for-sale fi nancial asset note Group Company Group Company R000 R000 R000 R000 3 INVESTMENT PROPERTIES STATED AT FAIR VALUE Property acquisitions Capital expenditure and tenant installations Acquisition costs Net gain from fair value adjustment of investment properties FAIR VALUE Lease commissions At end of year Less: Fair value of investment properties held for sale ( ) ( ) (92 333) (92 333) DETAILS OF INVESTMENT PROPERTIES The directors have valued the group s property portfolio at R5.35 billion as at 31 March 2011 (R4.90 billion: 31 March 2010) using the discounted cash fl ow of the future income stream method. This is R462.8 million or 9.4% higher than the valuation as at 31 March The external valuations performed by C B Richard Ellis (Pty) Ltd and Colliers Property and Facilities Management (Pty) Ltd at 31 March 2011 on 56.5% of the total portfolio were R181 million or 6% higher than the directors valuations of the same properties. However, the 6% difference is within acceptable industry norms. The group s properties were valued by the valuation division of the group. These valuations were reviewed and approved by the directors of the company, whose experience is refl ected in the directors report. The group s properties are encumbered as security for the securitised debt and bank loans to the value of R1.74 billion (note 18). 74

79 Group Company Group Company R000 R000 R000 R000 ANNUAL FINANCIAL STATEMENTS 3 INVESTMENT PROPERTIES (continued) 3.2 VALUATION ASSUMPTIONS The range of the reversionary capitalisation rates applied to the portfolio are between 10.25% and 17.75% with the weighted average being approximately 11.57%. The discount rates applied range between 12.23% and 19.77% with the weighted average being approximately 13.59%. In determining future cash fl ows for valuation purposes, vacancies are forecast for each property based on estimated demand. 3.3 MOVEMENT FOR THE YEAR Investment properties at 1 April Capital expenditure and tenant installations Acquisitions and development costs Change in fair value of investment properties Disposal of investment properties ( ) ( ) (1 599) Lease commissions (amortised)/capitalised (827) (1 048) Investment properties at 31 March Refl ected on the statement of fi nancial position under: Non-current assets Non-current assets held for sale STRAIGHT-LINE RENTAL INCOME ADJUSTMENT Balance at 1 April Current year movement Balance at 31 March Non-current portion Non-current assets held for sale INTANGIBLE ASSET Balance at 1 April Impairment (49 935) (49 935) Balance at 31 March The intangible asset arose on the acquisition of the property asset management contract in respect of the long-term commercial property portfolio of the Sanlam Group. The asset management agreement is evergreen and can only be terminated in specifi c circumstances. These circumstances have been assessed and are not currently foreseeable. Consequently the intangible asset has been determined to have an indefi nite useful life. 75

80 Notes to the annual fi nancial statements (continued) Group Company Group Company R000 R000 R000 R000 5 INTANGIBLE ASSET (continued) The intangible asset was tested for impairment by comparing the estimated recoverable amount with the carrying value. The recoverable amount, which is based on a revised forecast income profi le, was calculated using the discounted cash fl ow method. The change in the forecast income profi le, together with the increase in the discount rate, has resulted in the recoverable amount being forecast at R49.93 million lower than the carrying value. An impairment charge of R49.93 million has been raised. The forecast cash fl ows were discounted at a rate equivalent to the government R208 rate at 31 March 2011 plus an appropriate risk premium. 6 FURNITURE, FITTINGS AND COMPUTER EQUIPMENT Cost Accumulated depreciation (738) (161) (209) (141) Carrying value MOVEMENT FOR THE YEAR Net carrying value at 1 April Additions Additions in business combination acquired Disposals to subsidiary (1 129) Disposals (19) (7) Depreciation (534) (23) (136) (50) Net carrying value at 31 March Company R000 Company R000 7 INVESTMENT IN SUBSIDIARIES DIRECT HOLDING Linked units at cost 100% holding in MICC Property Income Fund Limited ( %) (1) INDIRECT HOLDING MICC Properties (Pty) Ltd (1) MICC Properties Namibia (Pty) Ltd (2) Katima Mulilo Properties (Pty) Ltd (2) Katatura Properties (Pty) Ltd (2) Kavango West Shopping Centre (Pty) Ltd (2) Oluno Properties (Pty) Ltd (2) Oshakati Properties (Pty) Ltd (2) Oshikango Properties (Pty) Ltd (2) Super Deca Properties (Pty) Ltd (2) MICC House Namibia (Pty) Ltd (2) All the companies are 100% held within the MICC Group SPECIAL PURPOSE ENTITY Vukile Investment Property Securitisation (Pty) Ltd ( VIPS ) (1) Total investment in subsidiaries (1) Incorporated in the Republic of South Africa. (2) Incorporated in Namibia. 76

81 Company Company R000 R000 ANNUAL FINANCIAL STATEMENTS 7 INVESTMENT IN SUBSIDIARIES (continued) LOANS (TO)/FROM SUBSIDIARIES MICC Property Income Fund Limited (1) (2 477) Katima Mulilo Properties (Pty) Ltd (2) Katatura Properties (Pty) Ltd (2) Kavango West Shopping Centre (Pty) Ltd (2) Oluno Properties (Pty) Ltd (2) Oshakati Properties (Pty) Ltd (2) Oshikango Properties (Pty) Ltd (2) Super Deca Properties (Pty) Ltd (2) (1) This loan was repaid in April 2011 and is not interest bearing. (2) The loans bear interest at market related deposit rates and are repayable on 45 days written notice Group Company Group Company R000 R000 R000 R000 8 AVAILABLE-FOR-SALE FINANCIAL ASSET Re-imbursement right Balance at 1 April Additional units recognised New performance and retention long-term incentive scheme approved Less: Units vested (16 638) (16 638) Movement of executive rights (13 536) (12 587) Fair value adjustment of re-imbursement right Adjustment for units forfeited on resignation (1 996) (1 377) The terms and conditions of the new long-term retention and incentive scheme were approved by unitholders at the annual general meeting held on 31 August

82 Notes to the annual fi nancial statements (continued) Rm Vesting dates 8 AVAILABLE-FOR-SALE FINANCIAL ASSET (continued) SCM has assumed the obligation to discharge Vukile s conditional fi nancial obligations towards its executives and management as follows: A Based on 25% retention and 75% performance 7.8 (i) July 2012 B Based on 25% critical performance area targets and 75% performance 4.8 (i) July 2013 C Based on 25% critical performance area targets and 75% performance 0.6 (i) July D Based on 25% critical performance area targets and 75% performance 2.4 (ii) July 2014 E Based on retention 0.4 (iii) July The executive directors have been allocated the following percentages of the schemes set out in A to D above: (i) G van Zyl % (i) MJ Potts % (ii) HC Lopion % (iii) The Vukile group employed one additional individual from Sanlam Properties on 1 January 2011 and assumed responsibility for inter alia, the rights and obligations regarding a long-term share-based retention scheme pertaining to said employee, against a payment from Sanlam Properties of R0.4 million. Vukile, through its subsidiary, MICC Property Income Fund Limited ( MICC IF ) which has employed the former Sanlam Properties employee, paid R0.4 million to discharge its obligations in this regard to SCM. MICC IF has paid an amount of R2.4 million to SCM in respect of units awarded to the employees of MICC IF as part of the long-term retention and incentive scheme. This re-imbursement right is stated at fair value after deduction of executive and management rights. Further details of the long-term retention and incentive share scheme are set out on page 49 to Group Company Group Company R000 R000 R000 R000 9 FINANCIAL ASSET AT AMORTISED COST Balance at 1 April Less: Amortised (668) (668) Balance at 31 March The fi nancial asset comprises an interest rate hedge premium of R5.45 million paid in respect of interest swap number 1, refer to note 18, which premium is amortised over the term of this underlying interest rate swap. 78

83 Group R000 Group R GOODWILL Balance at 1 April Less: Goodwill written-off on properties sold by a subsidiary during the year (5 192) Balance at 31 March ANNUAL FINANCIAL STATEMENTS Goodwill arose on the acquisition of 100% of MICC IF and represents a premium paid on the net assets and liabilities on each property purchased. Each operating segment relative to the acquisition is defi ned as a cash-generating unit. Goodwill written off comprises the goodwill allocated to the cash generating units (investment properties), arising on the acquisition of MICC IF in 2006, which have been sold, as follows: R000 Kleinfontein Offi ces 620 Ndabeni Business Park Nelspruit Game Centre The remaining cash-generating units have been valued using the discounted cash fl ow method in both reporting periods at amounts signifi cantly in excess of net asset value and goodwill. The discount rate used was 11.90% based on the Government R208 rate at 31 March 2011 plus a risk premium of 3.25%. Goodwill of R71.1 million is, therefore, not impaired. Available- Financial for-sale asset at Loans and financial amortised receivables asset cost R000 R000 R FINANCIAL INSTRUMENTS BY CATEGORY GROUP The accounting policies for fi nancial instruments have been applied to the line items below: 31 March 2011 Assets per statement of financial position Cash and cash equivalents Available-for-sale fi nancial asset Trade and other receivables (excluding prepayments) Financial asset at amortised cost

84 Notes to the annual fi nancial statements (continued) Other financial liabilities at amortised cost R000 Derivatives used for hedging R FINANCIAL INSTRUMENTS BY CATEGORY GROUP (continued) 31 March 2011 Liabilities per statement of financial position Other interest bearing borrowings Linked debenture and premium Derivative fi nancial instruments Trade and other payables Short-term bank fi nance Available- Financial for-sale asset at Loans and financial amortised receivables asset cost R000 R000 R March 2010 Assets per statement of financial position Cash and cash equivalents Available-for-sale fi nancial asset Trade and other receivables (excluding prepayments) Financial asset at amortised cost Other financial liabilities at amortised cost R000 Derivatives used for hedging R March 2010 Liabilities per statement of financial position Other interest bearing borrowings Linked debenture and premium Derivative fi nancial instruments Trade and other payables Short-term bank fi nance The following table presents fi nancial assets and liabilities measured at fair value in the statement of fi nancial position in accordance with the fair value hierarchy. This hierarchy groups fi nancial assets and liabilities into two levels based on the signifi cance of input used in measuring the fair value of the fi nancial assets and liabilities. The fair value hierarchy has the following levels: Level 1: Quoted prices (unadjusted) in active markets for identical assets or liabilities. Level 2: Inputs other than quoted prices included within Level 1 that are observable for the asset or liability either directly (i.e. as prices) or indirectly (i.e. derived from prices). Level 3: Inputs for the asset or liability that are not based on observable market data (unobservable inputs). 80

85 March Level 1 Level 2 Total Level 1 Level 2 Total ANNUAL FINANCIAL STATEMENTS 11 FINANCIAL INSTRUMENTS BY CATEGORY GROUP (continued) The level within which the fi nancial asset or liabilities is classifi ed, is determined based on the lowest level of signifi cant input to the fair value measured. The fi nancial assets and liabilities measured at fair value in the statement of fi nancial position are grouped into the fair value hierarchy as follows: Assets: Available-for-sale fi nancial assets Total Liabilities: Derivative fi nancial instruments (21 867) (21 867) (28 136) (28 136) Total (21 867) (21 867) (28 136) (28 136) Net fair value (21 867) (11 659) (28 136) (14 535) There have been no signifi cant transfers between Levels 1 and 2 in the reporting period under review. There were no transfers in or out of Level 3 in the reporting period under review. MEASUREMENT OF FAIR VALUE The methods and valuation techniques used for the purpose of measuring fair value are unchanged compared to the previous reporting period. AVAILABLE-FOR-SALE FINANCIAL ASSETS This comprises cash settled share based long-term incentive re-imbursement rights stated at fair value. Fair value has been determined by reference to Vukile s quoted closing price at the reporting date, after deduction of executive and management rights. DERIVATIVE FINANCIAL INSTRUMENTS The fair values of these swap contracts are determined by ABSA Capital using a valuation technique that maximises the use of observable market inputs. Derivatives entered into by the group are included in Level 2 and consist of interest rate swap contracts. 81

86 Notes to the annual fi nancial statements (continued) Group Company Group Company R000 R000 R000 R TRADE AND OTHER RECEIVABLES Gross rental receivables Impairment of receivables (9 911) (8 445) (10 248) (8 211) Prepaid expenses Sundry debtors Total Further information on receivables is set out in note LOAN TO SUBSIDIARY Vukile Investment Property Securitisation (Pty) Ltd ( VIPS ) The loan to subsidiary comprises the proceeds on the sale of two securitised properties, Hillcrest Centre and Pongola Shopping Centre. The proceeds are held by VIPS as security for loans to the company. The proceeds earn interest at market related deposit rates and are available to fi nance the acquisition of an investment property that meets the required securitisation covenants Group Company Group Company R000 R000 R000 R SHARE CAPITAL Authorised par value shares ordinary shares of one cent each Issued (2010: ) ordinary shares of one cent each Issued for the acquisition of properties Issued as consideration for the acquisition of MICC Property Income Fund Limited Issued as consideration for the acquisition of the asset management business In issue at end of the year

87 Company Company Number of Number of linked units linked units ANNUAL FINANCIAL STATEMENTS 14 SHARE CAPITAL (continued) Opening balance Issued on 1 January Issued on 3 September Balance at 31 March In terms of the memorandum of association and the debenture trust deed, the shares are linked with unsecured, subordinated, variable-rate debentures of four hundred and ninety cents each. This linkage means that each share may only be issued and traded together with the debenture with which it is indivisibly linked. SHARES UNDER CONTROL OF THE DIRECTORS 5% of the unauthorised shares of the company are under the control of the directors. This authority expires at the next annual general meeting Group Company Group Company R000 R000 R000 R SHARE PREMIUM Arising on the acquisition of properties Arising on the acquisition of MICC Property Income Fund Limited Arising on the acquisition of asset management business Balance at the end of the year RESERVES Non-distributable reserves Retained earnings Non-distributable reserves comprise the following: Investment property revaluation surplus net of deferred taxation and transfers (Loss)/profi t on mark-to-market valuation of cash fl ow hedges (22 228) 797 (28 290) (1 149) Valuation adjustments to available-for-sale fi nancial assets (19 830) (17 499) (16 274) (15 768) Share-based payment reserve

88 Notes to the annual fi nancial statements (continued) Group Company Group Company R000 R000 R000 R LINKED DEBENTURES AND PREMIUM Issued (2010: ) unsecured subordinated, variable-rate debentures of 490 cents each Debenture premium The issue of each debenture is linked to one ordinary share in the share capital of the company, together comprising one linked unit. Any further issues of linked units will be in the same ratio. In terms of the debenture trust deed, the aggregate interest entitlement of every debenture linked to each ordinary share in respect of any fi nancial year shall not be less than 99% of distributable earnings of an income nature unless the directors exercise their discretion to reduce this percentage below 99%, but not less than 90%, prior to 31 March each year. The debentures will be redeemed at their par value in accordance with the provisions of this trust deed and/or the relevant supplemental Debenture Trust Deed in the ordinary course as and when they fall due for payment. The issue of debentures will be redeemable by the company in full at any time after 25 (twenty-fi ve) years after the date of allotment of the relevant debentures. The debenture holders may exercise the right to require the debentures to be redeemed in accordance with the debenture trust deed, only by special resolution, whereafter the debentures shall be redeemed by the company at their nominal value on the last Friday, which must be a business day, prior to the 5th (fi fth) anniversary of the date on which the special resolution is passed. The debenture premium is amortised over 25 years and discounted at a rate equivalent to the Government R208 rate at 31 March 2011 plus an appropriate risk premium Group Company Group Company R000 R000 R000 R OTHER INTEREST BEARING BORROWINGS Secured fixed rate loans Nedbank Limited Vukile Investment Property Securitisation (Pty) Ltd ( VIPS ) Less: Net debt raising fee offset against borrowings (6 801) (3 063) Secured variable rate loans Noteholders Less: Net debt raising fee offset against borrowings (6 801) (3 063) ABSA facility Less: Net debt raising fees offset against borrowings ( 1 098) (1 098) (243) (31) Interest bearing borrowings Interest bearing borrowings current ABSA facility/noteholders Nedbank Limited

89 ANNUAL FINANCIAL STATEMENTS 18 OTHER INTEREST BEARING BORROWINGS (continued) DETAILS OF INTEREST BEARING BORROWINGS 31 MARCH 2011 Vukile Investment Property Securitisation (Pty) Ltd ( VIPS ) is Vukile s securitisation vehicle which issued R1 020 million of variable rate notes to noteholders. The funds so raised were on-lent to Vukile as a fi xed interest rate loan. Fixed rate loans VIPS Facility utilised R1 020 million Dates of repayment R462 million November 2013 (3 year loan) R250 million May 2012 (3 year loan) R308 million November 2012 (7 year loan) Fixed interest rate 9.76%, 9.82% and 10.24% (NACQ) all-in rate Repayment terms Interest only, quarterly in arrears. Capital on maturity. Overall fi nancial covenants Loan to investment property valuation ratio (borrower) 65% (currently 28.7%) Interest cover ratio 2.0:1 (currently 4.5:1) Security Secured by way of mortgage bonds over Vukile s securitised investment properties and a pledge of rentals receivable. Nedbank Amount R251.2 million Date of repayment August 2011 Term 5 years Fixed interest rate (NACQ) 10.94% Repayment terms Interest only, quarterly in arrears. Capital on maturity. Loan to investment property ratio 50% (currently 35.5%) Variable rate loans ABSA Bank Total facility available R548 million Facility drawn down R413 million Date of repayment May 2012 (Vukile: R214 million) May 2012 (MICC: R199 million) Variable interest rate Prime less 2.1% and 3 month JIBAR plus 1.40% to 1.69% Repayment terms Interest only, monthly in arrears. Capital on maturity. Loan to non-securitised investment Vukile loans: 70% (currently 24.5%) (1) property valuation ratio MICC loans: 50% (currently 35.5%) Interest cover ratio 1.8:1 times after inter-company adjustment (currently 3.0:1): MICC 2.0:1 times after inter-company adjustments (currently 3.5:1): Vukile Security Secured by way of mortgage bonds over MICC and Vukile s non-securitised investment properties and a pledge of rentals receivable. (1) This ratio for the ABSA loans to Vukile is calculated by adding any negative mark-to-market valuation of the group s interest rate swaps to Vukile s loans in respect of the non-securitised investment properties. 85

90 Notes to the annual fi nancial statements (continued) 18 OTHER INTEREST BEARING BORROWINGS (continued) DETAILS OF INTEREST BEARING BORROWINGS 31 MARCH 2011 Owing to noteholders by VIPS Amount Dates of repayment R1 020 million R462 million November 2013 (3 year loan) R250 million May 2012 (3 year loan) R308 million November 2012 (7 year loan) Variable interest rate Repayment terms Loan to investment property valuation ratio (borrower) 65% (currently 28.7%) Interest cover ratio 2.0:1 (currently 4.5:1) Security ABSA Bank Access facility R100 million Facility utilised Nil Date of repayment On demand Variable interest rate Prime less 2.1% 3 months JIBAR plus note margins Interest only quarterly in arrears. Capital on maturity Secured by way of mortgage bonds over securitised investment properties and a pledge of rentals receivable. An overdraft facility of R45 million and a hedging facility of R112.5 million have been provided by ABSA Bank to the group. These facilities are also secured by mortgage bonds over the non-securitised investment properties and rentals receivable Group Company Group Company Assets/ Assets/ Assets/ Assets/ (liabilities) (liabilities) (liabilities) (liabilities) R000 R000 R000 R000 Derivative fi nancial instruments Interest rate swaps cash fl ow hedges (21 867) (28 136) (995) Swap 1 Swap 2 Swap 3 Swap 4 Swap 5 Swap 6 Swap 7 Interest rate swaps Nominal value (Rm) Swap period 3 years 7 years 2.8 years 3 years 3 years 5 years 3.5 years Maturity date Nov 2013 Nov 2012 May 2012 Sept 2013 May 2012 May 2012 May 2012 Rate (1) (NACQ) 9.76% 10.24% 9.82% 8.60% 8.41% 9.40% 9.60% (1) All-in rates including note margins plus amortised transactions costs. NACQ Nominal Annual Compounded Quarterly. JIBAR Johannesburg Interbank Acceptance Rate. BORROWING POWERS The borrowing capacity of the company and its subsidiaries, in terms of their articles of association, is unlimited, but is subject to loan covenants as detailed in this note. 86

91 Group Company Group Company R000 R000 R000 R DEFERRED TAXATION Deferred taxation liabilities comprise the following: Fair value adjustments Straight-line rental income adjustment Other temporary differences Movement Balance at 1 April Fair value adjustment (7 053) Capital gains tax losses utilised Straight-line rental income adjustment (4 039) (4 097) Other temporary differences (1 694) (926) Under-provision of other temporary differences in prior year (18) (18) Deferred tax asset tax losses (1 136) (1 136) Balance at 31 March ANNUAL FINANCIAL STATEMENTS 20 TRADE AND OTHER PAYABLES Trade creditors Accrued expenses Tenant deposits FINANCIAL RISK MANAGEMENT The group s fi nancial instruments consist mainly of interest rate swaps, fi nancial assets, deposits with banks, accounts receivable and payable, long-term borrowings and loans to and from subsidiaries. In respect of all fi nancial instruments listed above, the book value approximates fair value. The group purchases or issues fi nancial instruments to fi nance operations and to manage interest rate risks that may arise from time to time. The board of directors has overall responsibility for the establishment and oversight of the group s risk management framework. The audit and risk committee is responsible for developing and monitoring the group s risk management policies. The audit and risk committee reports regularly to the board of directors on its activities. The group s risk management policies are established to identify and analyse the risks faced by the group, to set appropriate risk limits and controls, and to monitor risks and adherence to limits. Risk management policies and systems are reviewed regularly to refl ect changes in market conditions and the group s activities. The audit and risk committee oversees how management monitors compliance with the group s risk management policies and procedures and reviews the adequacy of the risk management framework in relation to the risks faced by the group. The audit and risk committee is assisted in its oversight role by the internal auditors, KPMG. KPMG undertakes both regular and ad hoc reviews of risk management controls and procedures, the results of which are reported to the audit and risk committee. CREDIT RISK MANAGEMENT Potential areas of credit risk comprise mainly cash and trade receivables. In order to minimise any possible risks relating to such investments, surplus funds can only be invested in the Big 5 banks and AAA rated money market funds up to pre-determined levels. Trade receivables consist of a large, widespread tenant base. Management has established a credit policy in terms of which each new tenant is analysed individually for credit worthiness before the group s standard payment terms and conditions are offered which include, in the majority of cases, the provision of a deposit of at least one month s rental. When available, the group s credit review includes external ratings. The group monitors the fi nancial position of its tenants on an ongoing basis. Adjustment is made for impairment of specifi c bad debts and at year end management did not consider there to be any material credit risk exposure, not covered by an allowance for doubtful debts. The group impairment allowance for doubtful debts amounted to approximately R9.9 million (2010: R10.2 million) net of tenant deposits held as security. 87

92 Notes to the annual fi nancial statements (continued) 21 FINANCIAL RISK MANAGEMENT (continued) The group held tenant cash deposits amounting to R33.6 million at 31 March 2011 (2010: R27.5 million) as collateral for the rental commitments of tenants. The individually impaired receivables relate mainly to non-national tenants which have been summonsed for non-payment of rentals, or who have vacated the premises due to diffi cult economic conditions. It was assessed that a portion of the receivables is expected to be recovered. The ageing of the provision for bad debts in respect of the impaired receivables is as follows: Group Company Group Company R000 R000 R000 R000 Not more than 30 days More than 30 days but not more than 60 days More than 60 days but not more than 90 days More than 90 days At 31 March At reporting date there were no specifi c concentrations of credit risk. DISCLOSURE OF RECEIVABLES PAST DUE BUT NOT IMPAIRED Past due Amounts uncollected one day or more beyond their contractual due date are past due. Trade receivables that are less than three months past due and that are subject to a dispute are not considered impaired until the resolution of the dispute. As of 31 March 2011, group trade receivables of R11.1 million (2010: R11.6 million) were past due but not impaired. Company trade receivables of R8.5 million (2010: R8.1 million) were past due but not impaired at 31 March These related to a number of independent customers for whom there is no recent history of default Group Company Group Company R000 R000 R000 R000 The age analysis of these trade receivables is as follows: Not more than 30 days More than 30 days but not more than 60 days More than 60 days but not more than 90 days More than 90 days Movements on the group allowance for impairment of trade receivables are as follows: At 1 April Allowance for receivables impairment Receivables written off during the year as uncollectable (2 647) (2 129) (3 482) (2 995) At 31 March

93 ANNUAL FINANCIAL STATEMENTS 21 FINANCIAL RISK MANAGEMENT (continued) Allowance for impaired receivables and receivables written off have been included in operating costs in note 23 to the annual fi nancial statements. Amounts charged to the allowance account are generally written off when there is no expectation of recovering additional cash. MARKET RISK Interest rate risk management At 31 March 2011, the group had interest bearing borrowings of R million. 98% of the interest bearing debt has been fi xed. The group s interest rate risk management position and maturity analysis of other interest bearing borrowings are summarised below: Rate Amount Maturity Interest Debt % Rm date rate Fixed 10.94% Aug 2011 Fixed Floating Prime less 2.1% 88.5 July 2011 Hedged at 9.40% (1) Floating 3 month JIBAR Nov 2013 Hedged at 9.76% Floating 3 month JIBAR May 2012 Hedged at 9.82% Floating 3 month JIBAR Nov 2012 Hedged at 10.24% Floating 3 month JIBAR May 2012 Hedged at 8.60% (1) Floating 3 month JIBAR 12.4 May 2012 Hedged at 8.41% (1) Floating Prime less 2.1% 54.8 July 2011 Hedged at 9.60% (1) Floating Prime less 2.1% 55.1 May 2012 Variable Total (1) Includes bank and note margins and amortised transaction costs. The short-term fl oating access facility of R100 million is not hedged. It is estimated that for the year ended 31 March 2011, a 1% change in interest rates would have affected the group s profi t before debenture interest by approximately R Details of the group s interest rate swap contracts are set out in note 18 of the annual fi nancial statements. Current Non-current Non-current 12 months 1-5 years > 5 years R000 R000 R000 Maturity analysis Other interest bearing borrowings Linked debentures and premium Trade and other payables Liquidity risk management Liquidity risk is the risk that the group will not be able to meet its fi nancial obligations as they fall due. The group s policy is to optimise its exposure to liquidity risk by balancing its exposure to interest rate risk and to refi nancing risk. 89

94 Notes to the annual fi nancial statements (continued) 21 FINANCIAL RISK MANAGEMENT (continued) In effect, the group seeks to borrow for as long as possible at the lowest acceptable cost. The group regularly reviews the maturity profi le of its fi nancial liabilities and seeks to avoid concentration of maturities through the regular replacement of facilities and by using a selection of maturity dates. The tables on page 89 set out the maturity analysis of the group s fi nancial liabilities based on the undiscounted contractual cash fl ows. On expiry of the R1 020 million notes issued to note holders by VIPS, it is intended to roll over this debt, in terms of the securitisation programme, by way of a fresh issue of R1 020 million. The linked debentures are redeemable after 25 years from date of allotment, which redemption will be fi nanced by way of a new issue of linked debentures of an equivalent amount. New long-term loans will be entered into with relevant banks on the expiry of existing bank debt facilities. Cash fl ows are monitored on a monthly basis to ensure that cash resources are adequate to meet funding requirements. In terms of covenants with Nedbank and in respect of the ABSA loans to a subsidiary, the nominal value of long-term interest bearing bank debt may not exceed 50% of the value of non-securitised assets. The securitisation loan to value covenant is 65% of the external values of securitised property assets. In terms of the ABSA loans to Vukile the nominal value of long-term interest bearing debt together with the value of any negative mark-to-market valuation of interest rate hedges may not exceed 70% of the external value of the non-securitised properties. Full details hereof are set out in note 18. The directors have imposed a 45% loan to value ratio in determining the limit of the company s external borrowings Group R000 Group R000 Value of property assets % thereof Nominal value of borrowings utilised at year end ( ) ( ) Potential borrowing capacity Group Company Group Company R000 R000 R000 R REVENUE Property revenue Income from asset management business Included in property revenue: Turnover rental

95 Group Company Group Company R000 R000 R000 R PROPERTY EXPENSES Municipal fi xed charges Municipal consumption costs Operating costs Repairs and maintenance Asset management fees Property management fees ANNUAL FINANCIAL STATEMENTS 24 PROFIT FROM ASSET MANAGEMENT BUSINESS Income Income asset management fees Sales commission Less: Sales fee paid (390) (390) (146) (146) Management and other fees Expenditure (20 233) (12 844) (7 141) (3 168) Administration costs (4 029) (12 844) (2 110) (3 168) Depreciation (512) (86) Staff costs (14 424) (4 680) Rent paid (1 268) (265) Profi t from asset management business CORPORATE ADMINISTRATIVE EXPENSES Administration expenses include: Administration costs Depreciation of furniture, fi ttings and computer equipment Operating lease: Premises Share-based remuneration Corporate staff and related costs (excluding directors remuneration) Internal audit fee Loss on disposal of furniture, fi ttings and computer equipment 4 3 SHARE-BASED REMUNERATION As reported previously, the board of Vukile has replaced the original long-term incentive bonus scheme with a new long-term retention and incentive scheme which is based on individual performance relative to personal critical performance area targets (25%) and company s performance relative to industry benchmarks (75%). Refer to note 8 in this regard together with pages 49 to 50 of the integrated report. The charges to the company income statement for the year ended 31 March 2011 amounted to R1.19 million (old scheme) and R3.35 million (new scheme) and to the MICC Property IF s income statement R2.12 million (asset management business). Following the resignation of two employees, credits of R (Vukile) and R (MICC) have arisen which will reduce the above charges. As the above are equity-settled share-based payments, the accounting treatment is to recognise the share-based payments on a straight-line basis over the vesting periods. 91

96 Notes to the annual fi nancial statements (continued) Group Company Group Company R000 R000 R000 R AUDITORS REMUNERATION Audit fees Current year Other services INVESTMENT AND OTHER INCOME Debenture interest received from subsidiary Proceeds on termination of swaps Dividends received from subsidiary and securitisation preference share trust Interest on deposits and receivables Management fees received Other income FINANCE COSTS Secured loans Amortisation of debt raising fees Fair value losses on interest rate swaps TAXATION Normal taxation Capital gains tax on property sales Secondary taxation on companies ( STC ) and NRST Deferred taxation under-provision in prior year (18) (18) Deferred taxation on straight-line rental accrual (4 039) (4 097) Deferred taxation asset tax losses utilised (1 136) (1 136) Deferred taxation on fair value adjustment of investment properties (7 053) Deferred taxation on other temporary differences (1 693) (926) (2 485) % % % % Reconciliation of tax rate Standard tax rate Permanent differences (6.25) (9.75) 0.52 (0.54) STC/NRST Change in use (2.49) (2.67) (4.22) (4.85) Prior year adjustment (0.02) Namibia rate differential Deferred tax asset not recognised (0.07) Other Effective tax rate

97 30 RECONCILIATION OF GROUP NET PROFIT TO HEADLINE EARNINGS AND TO PROFIT AVAILABLE FOR DISTRIBUTION Group Cents per Group Cents per R000 linked unit R000 linked unit ANNUAL FINANCIAL STATEMENTS Attributable profi t after taxation ADJUSTED FOR: Debenture interest Earnings per linked unit Change in fair value of investment properties (78 494) (22.89) ( ) (96.62) Total tax effects of adjustments Change in goodwill on properties sold by a subsidiary Loss/(profi t) on sale of revalued properties (1 387) (0.46) Impairment of intangible asset Amortisation of debenture premium (2 519) (0.73) (1 361) (0.45) Headline earnings of linked units Straight-line rental accrual net of deferred taxation (18 407) (5.36) (4 979) (1.64) Adjustment for reduced distribution in respect of new issue of shares 3.29 Available for distribution Group R000 Group R000 CALCULATION OF DISTRIBUTABLE EARNINGS Net profi t from property operations Less: Straight-line income adjustment (14 368) (7 041) Investment and other income Net income from the asset management business Administrative expenses (25 509) (23 781) Finance costs ( ) ( ) Taxation (excluding deferred tax on revaluation adjustments) (6 401) (6 880) Available for distribution

98 Notes to the annual fi nancial statements (continued) Group Company Group Company Note R000 R000 R000 R STATEMENT OF CASH FLOWS The following convention applies to fi gures under adjustments below. Infl ows of cash are represented by fi gures in brackets, while outfl ows of cash are represented by fi gures without brackets ADJUSTMENTS Gross change in fair value of investment properties (92 862) (3 316) ( ) ( ) Finance costs Debenture interest Investment and other income (14 380) (99 993) (21 188) (98 340) Share-based remuneration Interest swaption amortisation (207) (207) Amortised available-for-sale fi nancial asset Share-based remuneration refunded by Sanlam Properties (3 878) Loss on disposal of fi xed assets 4 3 Change in goodwill on sale of properties by a subsidiary Loss/(profi t) on sale of investment properties (1 387) Impairment of intangible asset Depreciation on furniture, fi ttings and equipment Amortisation of debenture premium (2 519) (2 519) (1 361) (1 361) NET CHANGES IN WORKING CAPITAL Movement in working capital Increase in trade and other receivables (24 667) (46 654) (17 613) (15 786) Increase/(decrease) in trade and other payables (310) (12 933) (4 020) (16 096) 31.3 TAXATION PAID/(REFUNDED) Amount owing at beginning of year (6) (766) Capital gains taxation Current taxation Secondary taxation on companies and non-resident shareholders tax (703) Net amount owing at end of year (5 416) (4 140) (2 373) 6 Tax paid/(refunded) during year (697) 31.4 DISTRIBUTION TO LINKED UNITHOLDERS Distribution to linked unitholders owing at beginning of year Debenture interest per income statement Dividends declared Distribution to linked unitholders owing at end of year ( ) ( ) ( ) ( ) Distribution paid during the year

99 32 RELATED PARTY TRANSACTIONS GROUP Details of the transactions with directors, including key management, are set out in the Directors report. Apart from the executive directors, no employees are considered to be key management personnel Amounts Amounts owed owed Amount to/(by) Amount to/(by) paid/ related paid/ related Type of (received) parties (received) parties transaction R000 R000 R000 R000 ANNUAL FINANCIAL STATEMENTS The following are related party transactions: Sanlam Life Insurance Limited Lease rentals (6 196) 500 Asset management and other fees received (63 270) (10 074) (5 953) Sanlam Properties (Pty) Ltd Asset management and other fees Consulting fees (1 431) (280) Sanlam Capital Markets Assumption of (Pty) Ltd company s conditional fi nancial obligations to senior management 430 (1) (1) Gensec Property Services Property Limited trading as JHI management and other fees Kuper Legh Property Group Property management and other fees (1) Included in this amount is R0.4 million which has been reimbursed by Sanlam Properties (Pty) Ltd ( SP ) in respect of the long-term incentive scheme liabilities assumed by the Vukile Group on the take-over of the SP employees involved in the asset management business. All above amounts were paid or received by May Sanlam Properties (Pty) Ltd, Sanlam Life Insurance Limited and Sanlam Capital Markets (Pty) Ltd are subsidiaries of Sanlam Limited which held directly and indirectly through Lazarus Capital (Pty) Ltd a total of or 37.5% of the issued linked units of Vukile Property Fund Limited at 31 March Sanlam Limited sold its minority interest in Gensec Property Services Limited trading as JHI, during the year. Kuper Legh Property Group is controlled by an individual who is also a signifi cant unitholder in Vukile. 95

100 Notes to the annual fi nancial statements (continued) Directors Gross Effective valuation Properties owned lettable Purchase date of at 31 Mar Expenby the group at area price acqui Revenue diture March 2011 Region Town m 2 R000 sition R000 R000 R OPERATING SEGMENT REPORT OFFICES Arivia.kom Building Gauteng Midrand Apr DLV Building Gauteng Pretoria Apr Barlow Place Gauteng Sandton Apr Mutual and Federal Gauteng Pretoria Apr Pinepark Western Cape Cape Town Apr Eva Park Gauteng Johannesburg Apr Louis Leipoldt Hospital Western Cape Bellville Apr Nelspruit Prorom Mpumalanga Nelspruit Apr Bedfordview GIS Gauteng Johannesburg Apr West Street Gauteng Centurion Apr East London Sanlam Park Eastern Cape East London Apr Durban Embassy KwaZulu-Natal Durban Apr Oakhurst Parktown Gauteng Johannesburg Mar th Road Hyde Park Gauteng Sandton Sept Waymark Offi ces Gauteng Centurion Mar West Street Houghton Gauteng Houghton Sept Pretoria Hatfi eld Sanlam Building Gauteng Pretoria Sept Pretoria Sanwood Park Gauteng Pretoria Sept Sandton St Andrews Complex Gauteng Sandton Sept Sandton Sunninghill Place Gauteng Sandton Sept Randburg Triangle Gauteng Randburg Oct De Tijger Offi ce Park Western Cape Cape Town Oct INDUSTRIAL Sony Building Gauteng Midrand Apr Supra Hino Gauteng Johannesburg Apr Hellman International Gauteng Johannesburg Apr Valley View Industrial Park KwaZulu-Natal Durban Apr Village Main Industrial Park Gauteng Johannesburg Apr John Griffi n Gauteng Johannesburg Apr AAD Western Cape Cape Town Apr Richmond Park KwaZulu-Natal Durban Apr Centurion N1 Gauteng Centurion Apr Midrand Allandale undeveloped land Gauteng Midrand Apr Midrand Sanitary City Gauteng Midrand Apr Parow Industrial Park Western Cape Cape Town Apr Midrand Allandale Park Gauteng Midrand Apr Germiston R24 Gauteng Germiston Apr Randburg Trevallyn Gauteng Randburg Apr Pinetown Westmead Kyalami Park KwaZulu-Natal Pinetown Sept Randburg Tungsten Gauteng Randburg Oct Robertville Mini Factories Gauteng Johannesburg Oct

101 Linked Interest Gross deben- bearing weighted Properties owned tures and borrow- average Vaby the group at Goodwill premiums ings rental cancy March 2011 Region Town R000 R000 R000 R/m 2 pm % 33 OPERATING SEGMENT REPORT (continued) OFFICES Arivia.kom Building Gauteng Midrand DLV Building Gauteng Pretoria Barlow Place Gauteng Sandton Mutual and Federal Gauteng Pretoria Pinepark Western Cape Cape Town Eva Park Gauteng Johannesburg Louis Leipoldt Hospital Western Cape Bellville Nelspruit Prorom Mpumalanga Nelspruit Bedfordview GIS Gauteng Johannesburg West Street Gauteng Centurion East London Sanlam Park Eastern Cape East London Durban Embassy KwaZulu-Natal Durban Oakhurst Parktown Gauteng Johannesburg th Road Hyde Park Gauteng Sandton Waymark Offi ces Gauteng Centurion West Street Houghton Gauteng Houghton Pretoria Hatfi eld Sanlam Building Gauteng Pretoria Pretoria Sanwood Park Gauteng Pretoria Sandton St Andrews Complex Gauteng Sandton Sandton Sunninghill Place Gauteng Sandton Randburg Triangle Gauteng Randburg De Tijger Offi ce Park Western Cape Cape Town ANNUAL FINANCIAL STATEMENTS INDUSTRIAL Sony Building Gauteng Midrand Supra Hino Gauteng Johannesburg Hellman International Gauteng Johannesburg Valley View Industrial Park KwaZulu-Natal Durban Village Main Industrial Park Gauteng Johannesburg John Griffi n Gauteng Johannesburg AAD Western Cape Cape Town Richmond Park KwaZulu-Natal Durban Centurion N1 Gauteng Centurion Midrand Allandale undeveloped land Gauteng Midrand Midrand Sanitary City Gauteng Midrand Parow Industrial Park Western Cape Cape Town Midrand Allandale Park Gauteng Midrand Germiston R24 Gauteng Germiston Randburg Trevallyn Gauteng Randburg Pinetown Westmead Kyalami Park KwaZulu-Natal Pinetown Randburg Tungsten Gauteng Randburg Robertville Mini Factories Gauteng Johannesburg

102 Notes to the annual fi nancial statements (continued) Directors Gross Effective valuation Properties owned lettable Purchase date of at 31 Mar Expenby the group at area price acqui Revenue diture March 2011 Region Town m 2 R000 sition R000 R000 R OPERATING SEGMENT REPORT (continued) RETAIL Truworths Centre Mpumalanga Nelspruit Apr Grosvenor Shopping Centre Gauteng Johannesburg Apr Pine Crest Centre KwaZulu-Natal Durban Apr Lichtenburg Sanlam Centre North West Lichtenburg Apr Barlows Audi** Western Cape Cape Town Apr Bloemfontein Plaza and Parkade Free State Bloemfontein Apr Daveyton Shopping Centre Gauteng Johannesburg Apr Dobsonville Shopping Centre Gauteng Johannesburg Apr Durban Phoenix Plaza KwaZulu-Natal Durban Apr Randburg Square Gauteng Randburg Apr Moratiwa Crossing Limpopo Jane Furse Nov Kimberley Kim Park Northern Cape Kimberley Sept Nelspruit Sanlam Centre Mpumalanga Nelspruit Sept Rustenburg Edgars Building North West Rustenburg Sept Roodepoort Hillfox Power Centre Gauteng Roodepoort Oct Mala Plaza Limpopo Malamulele Oct Masingita Spar Centre Limpopo Giyani Oct Piet Retief Shopping Centre Mpumalanga Piet Retief Oct Qualbert Centre KwaZulu-Natal Durban Oct Kokstad Game Centre KwaZulu-Natal Kokstad Oct The Victoria Centre KwaZulu-Natal Pietermaritzburg Oct Meadowdale Land Gauteng Johannesburg Meadowdale Mall Gauteng Johannesburg Oct Oshakati Shopping Centre Namibia Oshakati Oct Oshikango Ellerines Centre Namibia Oshikango Oct Ondangwa Shoprite Checkers Namibia Ondangwa Oct Katatura Checkers Centre Namibia Katatura Oct BPI House Namibia Windhoek Jul HELD FOR SALE VWL Building* Gauteng Pretoria Apr Glencairn Building* Gauteng Johannesburg Apr Midtown Building* Gauteng Pretoria Apr Botbyl Subaru Building* Gauteng Pretoria Apr Truworths Building* Gauteng Johannesburg Apr Kleinfontein Offi ces* Gauteng Johannesburg Oct Oshakati Beares Furnishers* Namibia Oshakati Oct Rundu Ellerines* Namibia Rundu Oct Katima Mulilo Pep Stores* Namibia Katima Mulilo Oct

103 Linked Interest Gross deben- bearing weighted Properties owned tures and borrow- average Vaby the group at Goodwill premiums ings rental cancy March 2011 Region Town R000 R000 R000 R/m 2 pm % 33 OPERATING SEGMENT REPORT (continued) RETAIL Truworths Centre Mpumalanga Nelspruit Grosvenor Shopping Centre Gauteng Johannesburg Pine Crest Centre KwaZulu-Natal Durban Lichtenburg Sanlam Centre North West Lichtenburg Barlows Audi** Western Cape Cape Town Bloemfontein Plaza and Parkade Free State Bloemfontein Daveyton Shopping Centre Gauteng Johannesburg Dobsonville Shopping Centre Gauteng Johannesburg Durban Phoenix Plaza KwaZulu-Natal Durban Randburg Square Gauteng Randburg Moratiwa Crossing Limpopo Jane Furse Kimberley Kim Park Northern Cape Kimberley Nelspruit Sanlam Centre Mpumalanga Nelspruit Rustenburg Edgars Building North West Rustenburg Roodepoort Hillfox Power Centre Gauteng Roodepoort Mala Plaza Limpopo Malamulele Masingita Spar Centre Limpopo Giyani Piet Retief Shopping Centre Mpumalanga Piet Retief Qualbert Centre KwaZulu-Natal Durban Kokstad Game Centre KwaZulu-Natal Kokstad The Victoria Centre KwaZulu-Natal Pietermaritzburg Meadowdale Land Gauteng Johannesburg Meadowdale Mall Gauteng Johannesburg Oshakati Shopping Centre Namibia Oshakati Oshikango Ellerines Centre Namibia Oshikango Ondangwa Shoprite Checkers Namibia Ondangwa Katatura Checkers Centre Namibia Katatura BPI House Namibia Windhoek ANNUAL FINANCIAL STATEMENTS HELD FOR SALE VWL Building* Gauteng Pretoria Glencairn Building* Gauteng Johannesburg Midtown Building* Gauteng Pretoria Botbyl Subaru Building* Gauteng Pretoria Truworths Building* Gauteng Johannesburg Kleinfontein Offi ces* Gauteng Johannesburg Oshakati Beares Furnishers* Namibia Oshakati Rundu Ellerines* Namibia Rundu Katima Mulilo Pep Stores* Namibia Katima Mulilo

104 Notes to the annual fi nancial statements (continued) Directors Gross valuation Properties owned lettable Purchase at 31 Mar Expenby the group at area price 2011 Revenue diture March 2011 m 2 R000 R000 R000 R OPERATING SEGMENT REPORT (continued) Total group Lease commissions Asset management business Group total (excluding sold properties) Sold properties Group total * Investment property held for sale. ** Leasehold property. Add: Excluded items Intangible asset Development expenditure Furniture, fi ttings and computer equipment Available-for-sale fi nancial asset Derivative fi nancial instrument Goodwill Trade and other receivables Cash and cash equivalents Total assets Linked Interest deben- bearing Properties owned tures and borrowby the group at Goodwill premiums ings March 2011 R000 R000 R000 Total group Lease commissions Asset management business Group total Linked debentures and premiums and interest bearing borrowings * Investment property held for sale. ** Leasehold property. Add: Excluded items Equity and reserves Derivative fi nancial instruments Deferred taxation Trade and other payables Taxation payable Linked holders for distribution Total liabilities

105 Directors Gross Effective valuation Properties owned lettable Purchase date of at 31 Mar by the group at area price acqui Revenue March 2010 Region Town m 2 R000 sition R000 R000 ANNUAL FINANCIAL STATEMENTS 33 OPERATING SEGMENT REPORT (continued) OFFICES Arivia.kom Building Gauteng Midrand Apr DLV Building Gauteng Pretoria Apr VWL Building Gauteng Pretoria Apr Barlow Place Gauteng Sandton Apr Glencairn Building Gauteng Johannesburg Apr Mutual and Federal Gauteng Pretoria Apr Pinepark Western Cape Cape Town Apr Midtown Building Gauteng Pretoria Apr Eva Park Gauteng Johannesburg Apr Louis Leipoldt Hospital Western Cape Bellville Apr Nelspruit Prorom Mpumalanga Nelspruit Apr Bedfordview GIS Gauteng Johannesburg Apr West Street Gauteng Centurion Apr Andries Street Gauteng Pretoria Apr East London Sanlam Park Eastern Cape East London Apr Durban Embassy KwaZulu-Natal Durban Apr Oakhurst Parktown Gauteng Johannesburg Mar th Road Hyde Park Gauteng Sandton Sept Waymark Offi ces Gauteng Centurion Mar West Street Houghton Gauteng Houghton Sept Randburg Triangle Gauteng Randburg Oct Kleinfontein Offi ces Gauteng Johannesburg Oct De Tijger Offi ce Park Western Cape Cape Town Oct INDUSTRIAL Sony Building Gauteng Midrand Apr Supra Hino Gauteng Johannesburg Apr Hellman International Gauteng Johannesburg Apr Valley View Industrial Park KwaZulu-Natal Durban Apr Village Main Industrial Park Gauteng Johannesburg Apr John Griffi n Gauteng Johannesburg Apr AAD Western Cape Cape Town Apr Richmond Park KwaZulu-Natal Durban Apr Centurion N1 Gauteng Centurion Apr Midrand Allandale undeveloped land Gauteng Midrand Apr Midrand Sanitary City Gauteng Midrand Apr Parow Industrial Park Western Cape Cape Town Apr Midrand Allandale Park Gauteng Midrand Apr Germiston R24 Gauteng Germiston Apr Randburg Trevallyn Gauteng Randburg Apr Randburg Tungsten Gauteng Randburg Oct Robertville Mini Factories Gauteng Johannesburg Oct Ndabeni Business Park Western Cape Cape Town Oct

106 Notes to the annual fi nancial statements (continued) Linked Interest Gross deben- bearing weighted Properties owned Expen- tures and borrow- average Vaby the group at diture Goodwill premiums ings rental cancy March 2010 Region Town R000 R000 R000 R000 R/m 2 pm % 33 OPERATING SEGMENT REPORT (continued) OFFICES Arivia.kom Building Gauteng Midrand DLV Building Gauteng Pretoria VWL Building Gauteng Pretoria Barlow Place Gauteng Sandton Glencairn Building Gauteng Johannesburg Mutual and Federal Gauteng Pretoria Pinepark Western Cape Cape Town Midtown Building Gauteng Pretoria Eva Park Gauteng Johannesburg Louis Leipoldt Hospital Western Cape Bellville Nelspruit Prorom Mpumalanga Nelspruit Bedfordview GIS Gauteng Johannesburg West Street Gauteng Centurion Andries Street Gauteng Pretoria East London Sanlam Park Eastern Cape East London Durban Embassy KwaZulu-Natal Durban Oakhurst Parktown Gauteng Johannesburg th Road Hyde Park Gauteng Sandton Waymark Offi ces Gauteng Centurion West Street Houghton Gauteng Houghton Randburg Triangle Gauteng Randburg Kleinfontein Offi ces Gauteng Johannesburg De Tijger Offi ce Park Western Cape Cape Town INDUSTRIAL Sony Building Gauteng Midrand Supra Hino Gauteng Johannesburg Hellman International Gauteng Johannesburg Valley View Industrial Park KwaZulu-Natal Durban Village Main Industrial Park Gauteng Johannesburg John Griffi n Gauteng Johannesburg AAD Western Cape Cape Town Richmond Park KwaZulu-Natal Durban Centurion N1 Gauteng Centurion Midrand Allandale undeveloped land Gauteng Midrand Midrand Sanitary City Gauteng Midrand Parow Industrial Park Western Cape Cape Town Midrand Allandale Park Gauteng Midrand Germiston R24 Gauteng Germiston Randburg Trevallyn Gauteng Randburg Randburg Tungsten Gauteng Randburg Robertville Mini Factories Gauteng Johannesburg Ndabeni Business Park Western Cape Cape Town

107 Directors Gross Effective valuation Properties owned lettable Purchase date of at 31 Mar by the group at area price acqui Revenue March 2010 Region Town m 2 R000 sition R000 R000 ANNUAL FINANCIAL STATEMENTS 33 OPERATING SEGMENT REPORT (continued) RETAIL Botbyl Subaru Building Gauteng Pretoria Apr Truworths Centre Mpumalanga Nelspruit Apr Grosvenor Shopping Centre Gauteng Johannesburg Apr Truworths Building Gauteng Johannesburg Apr Pine Crest Centre KwaZulu-Natal Durban Apr Lichtenburg Sanlam Centre North West Lichtenburg Apr Barlows Audi** Western Cape Cape Town Apr Bloemfontein Plaza & Parkade Free State Bloemfontein Apr Daveyton Shopping Centre Gauteng Johannesburg Apr Dobsonville Shopping Centre Gauteng Johannesburg Apr Durban Phoenix Plaza KwaZulu-Natal Durban Apr Randburg Square Gauteng Randburg Apr Moratiwa Crossing Limpopo Jane Furse Nov Roodepoort Hillfox Power Centre Gauteng Roodepoort Oct Mala Plaza Limpopo Malamulele Oct Masingita Spar Centre Limpopo Giyani Oct Piet Retief Shopping Centre Mpumalanga Piet Retief Oct Nelspruit Game Centre Mpumalanga Nelspruit Oct Qualbert Centre KwaZulu-Natal Durban Oct Kokstad Game Centre KwaZulu-Natal Kokstad Oct The Victoria Centre KwaZulu-Natal Pietermaritzburg Oct Meadowdale Land Gauteng Johannesburg Meadowdale Mall Gauteng Johannesburg Oct Oshakati Shopping Centre Namibia Oshakati Oct Oshakati Beares Furnishers Namibia Oshakati Oct Oshikango Ellerines Centre Namibia Oshikango Oct Ondangwa Shoprite Checkers Namibia Ondangwa Oct Katatura Checkers Centre Namibia Katatura Oct Rundu Ellerines Namibia Rundu Oct Katima Mulilo Pep Stores Namibia Katima Mulilo Oct BPI House Namibia Windhoek Jul

108 Notes to the annual fi nancial statements (continued) Linked Interest Gross deben- bearing weighted Properties owned Expen- tures and borrow- average Vaby the group at diture Goodwill premiums ings rental cancy March 2010 Region Town R000 R000 R000 R000 R/m 2 pm % 33 OPERATING SEGMENT REPORT (continued) RETAIL Botbyl Subaru Building Gauteng Pretoria Truworths Centre Mpumalanga Nelspruit Grosvenor Shopping Centre Gauteng Johannesburg Truworths Building Gauteng Johannesburg Pine Crest Centre KwaZulu-Natal Durban Lichtenburg Sanlam Centre North West Lichtenburg Barlows Audi** Western Cape Cape Town Bloemfontein Plaza & Parkade Free State Bloemfontein Daveyton Shopping Centre Gauteng Johannesburg Dobsonville Shopping Centre Gauteng Johannesburg Durban Phoenix Plaza KwaZulu-Natal Durban Randburg Square Gauteng Randburg Moratiwa Crossing Limpopo Jane Furse Roodepoort Hillfox Power Centre Gauteng Roodepoort Mala Plaza Limpopo Malamulele Masingita Spar Centre Limpopo Giyani Piet Retief Shopping Centre Mpumalanga Piet Retief Nelspruit Game Centre Mpumalanga Nelspruit Qualbert Centre KwaZulu-Natal Durban Kokstad Game Centre KwaZulu-Natal Kokstad The Victoria Centre KwaZulu-Natal Pietermaritzburg Meadowdale Land Gauteng Johannesburg Meadowdale Mall Gauteng Johannesburg Oshakati Shopping Centre Namibia Oshakati Oshakati Beares Furnishers Namibia Oshakati Oshikango Ellerines Centre Namibia Oshikango Ondangwa Shoprite Checkers Namibia Ondangwa Katatura Checkers Centre Namibia Katatura Rundu Ellerines Namibia Rundu Katima Mulilo Pep Stores Namibia Katima Mulilo BPI House Namibia Windhoek

109 Directors Gross Effective valuation Properties owned lettable Purchase date of at 31 Mar by the group at area price acqui Revenue March 2010 Region Town m 2 R000 sition R000 R OPERATING SEGMENT REPORT (continued) HELD FOR SALE PROPERTIES Hillcrest Centre* Gauteng Johannesburg April Atlas Road Complex* Gauteng Johannesburg April Pongola Shopping Centre* KwaZulu-Natal Pongola April Total group Lease commissions Asset management business Group total * Investment property held for sale. ** Leasehold property. Add: Excluded items Intangible asset Development expenditure Furniture, fi ttings and computer equipment Available-for-sale fi nancial asset Derivative fi nancial instrument Goodwill Trade and other receivables Cash and cash equivalents Total assets ANNUAL FINANCIAL STATEMENTS Linked Interest Gross deben- bearing weighted Properties owned Expen- tures and borrow- average Vaby the group at diture Goodwill premiums ings rental cancy March 2010 R000 R000 R000 R000 R/m 2 pm % HELD FOR SALE PROPERTIES Hillcrest Centre* Atlas Road Complex* Pongola Shopping Centre* Total group Lease commissions Asset management business Group total * Investment property held for sale. ** Leasehold property. Add: Excluded items Equity and reserves Derivative fi nancial instruments Deferred taxation Trade and other payables Taxation payable Linked holders for distribution Total liabilities

110 Notes to the annual fi nancial statements (continued) Group R000 Group R CAPITAL MANAGEMENT The group s capital management objectives are: To ensure the group s ability to continue as a going concern. To provide an adequate return to shareholders by pricing services commensurately with the level of risk. The group monitors capital on the basis of the carrying amount of equity plus its unitholders linked debenture loans, less cash equivalents and cash fl ow hedges recognised in equity. Capital for the reporting periods under review is summarised as follows: Total equity Cash fl ow hedges Cash and cash equivalents ( ) ( ) Capital Total equity Borrowings Overall financing Capital-to-overall fi nancing ratio The board s policy is to maintain a strong capital base, comprising its unitholders interest, so as to maintain investor, creditor and market confi dence and to sustain future development of the business. It is the group s stated purpose to deliver long-term sustainable growth in distributions per linked unit. Generally, at least 99% of net profi ts, as defi ned in the debenture trust deed, are distributed on a six monthly basis. The board of directors monitors the level of distributions to unitholders and ensures compliance with the terms of the debenture trust deed. There were no changes in the group s approach to capital management during the year. Neither the company nor any of its subsidiaries are subject to externally imposed capital requirements. 106

111 Group Company Group Company R000 R000 R000 R000 ANNUAL FINANCIAL STATEMENTS 35 FUTURE MINIMUM LEASE INCOME Receivable within one year Receivable between one and fi ve years Receivable after fi ve years Total future contractual lease revenue Rental straight-line adjustment already accrued ( ) (80 786) (86 065) (66 154) Future straight-line lease revenue COMMITMENTS Operating lease commitments Premises Payable within one year Payable between one and fi ve years Other Payable within one year Payable between one and fi ve years Maintenance and other property related contracts Payable within one year Payable between one and fi ve years Capital commitments Authorised and contracted Authorised but not contracted It is intended that the above capital expenditure will be funded by way of bank facilities and surplus cash. 37 POST BALANCE SHEET EVENTS The company announced on SENS on 11 April 2011 that Giyani Plaza is to be acquired from Sanlam Life Insurance at a total outlay of R71.9 million, including estimated transaction costs. 107

112 Unitholders analysis at 31 March 2011 Number % % of total of of Number issued holders unitholders of units share capital ANALYSIS OF UNITHOLDINGS and more Total MAJOR BENEFICIAL UNITHOLDERS (5% and more of the linked units in issue) Lazarus Capital (Pty) Ltd Sanlam Limited and its subsidiaries Sanlam Properties (Pty) Ltd MAJOR INSTITUTIONAL UNITHOLDERS (5% and more of the linked units in issue) Stanlib Investec UNITHOLDER SPREAD Non-public Directors Holdings > 10% of issued capital Associates Public Total DISTRIBUTION OF UNITHOLDERS Banks Close corporations Individuals Insurance companies Medical aid schemes Collective investment schemes and mutual funds Trusts Other corporations Pension funds Private companies Total

113 UNITHOLDERS INFORMATION Unitholders information Vukile s appetite for acquisitions has not diminished and we are actively seeking new ways of enhancing our property portfolio through the addition of high quality new assets as well as the expansion and renovation of our existing properties. 109

114 Notice of annual general meeting Notice is hereby given that the 7th annual general meeting of the linked unitholders of Vukile Property Fund Limited ( Vukile or the company ) will be held in the Vukile Boardroom, First Floor, Meersig 1 Building, Constantia Boulevard, Constantia Kloof, 1709, Gauteng, at 11:00 on Wednesday 31 August All meeting participants, including proxies, will be required to provide identifi cation reasonably satisfactory to the chairman of meeting. A summarised form of the annual fi nancial statements is set out on pages 113 to 116. The complete annual fi nancial statements are set out on pages 54 to 107 of the integrated annual report. The purpose of the meeting is to transact the business set out below, and to consider and, if deemed fi t, to pass, with or without modifi cation, the resolutions set out below: 1 SPECIAL RESOLUTION NO.1 INTRA-GROUP FINANCIAL ASSISTANCE Resolved that the directors of the company be and are authorised to provide fi nancial assistance, as envisaged and subject to the provisions of section 45 of the Companies Act, 2008 (Act 71 of 2008) ( the Companies Act ) to any company constituting a 100% held subsidiary of the company. In order for this special resolution number 1 to be adopted, the support of at least 75% of the total number of votes, which the linked unitholders present or represented by proxy at this meeting are entitled to cast, is required. 2 SPECIAL RESOLUTION NO.2 NON-EXECUTIVE DIRECTOR REMUNERATION Resolved that the company be and is authorised, in terms of section 66 of the Companies Act, to pay remuneration to its directors for their services as directors for a period of one year from the passing of this resolution; and with effect of 1 April 2011, that annual retainers and meeting fees payable to non-executive directors be and are fi xed as follows: Basic retainer Non-executive director retainer R per annum Chairman retainers (inclusive of basic retainers) Board R per annum Audit and risk committee R per annum Human resources and nominations committee R per annum Investment committee R per annum Meeting fees Board R per meeting attended Audit and risk committee R per meeting attended Human resources and nominations committee R per meeting attended Investment committee An annual fee of R is payable due to the investment committee s business primarily being conducted on a round-robin basis. 110

115 The overall increase in non-executive directors remuneration for the year is equal to 10%. The board will conduct a comprehensive survey of non-executive directors fees during the year ending 31 March 2012 to ensure that directors fees continue to be aligned with the market norm. In order for this special resolution number 2 to be adopted, the support of at least 75% of the total number of votes which the linked unitholders present or represented by proxy at this meeting are entitled to cast, is required. 3 ORDINARY RESOLUTION NO.1 ANNUAL FINANCIAL STATEMENTS To present and adopt the annual fi nancial statements for the year ended 31 March 2011, including the reports of the directors, audit committee and independent auditors. Resolved to adopt the annual fi nancial statements for the year ended 31 March 2011, including the reports of the directors, audit committee and independent auditors. Brief CVs of all the directors appear on pages 12 to 13 of the integrated report. In order for this ordinary resolution number 4 to be adopted, the support of a majority of votes cast by linked unitholders present or represented by proxy at this meeting is required. 7 ORDINARY RESOLUTION NO.5 ELECTION OF MEMBERS TO AUDIT AND RISK COMMITTEE Resolved that the following directors, who meet the requirements of Section 94(4) of the Companies Act, be and are hereby elected on a separate (and not collective) basis as members of the audit and risk committee until the next annual general meeting: 7.1 Mr HSC Bester. 7.2 Mr PJ Cook. 7.3 Mr PS Moyanga. 7.4 Mr MH Serebro. UNITHOLDERS INFORMATION In order for this ordinary resolution number 1 to be adopted, the support of a majority of votes cast by linked unitholders present or represented by proxy at this meeting is required. 4 ORDINARY RESOLUTION NO.2 RE-APPOINTMENT OF AUDITORS The board and audit committee have evaluated the performance of Grant Thornton and recommend their re-appointment as auditors of the company. Resolved to re-appoint Grant Thornton (with the designated registered auditor being VR de Villiers) as auditors of the company for the year ending 31 March In order for this ordinary resolution number 2 to be adopted, the support of a majority of votes cast by linked unitholders present or represented by proxy at this meeting is required. 5 ORDINARY RESOLUTION NO.3 AUDITORS REMUNERATION Resolved that the directors be and are authorised to fi x and pay the auditors remuneration for the year ended 31 March In order for this ordinary resolution number 3 to be adopted, the support of a majority of votes cast by linked unitholders present or represented by proxy at this meeting is required. 6 ORDINARY RESOLUTION NO.4 RE-ELECTION OF DIRECTORS To elect directors in place of those retiring in accordance with the provisions of the company s memorandum of incorporation ( MOI ). Resolved that the following retiring directors, who retire in terms of articles 72 and 88 of the company s MOI, but being eligible, offer themselves for re-election, be and are hereby re-elected each on a separate (and not collective) basis: 6.1 Mr PS Moyanga. 6.2 Mr MH Serebro. 6.3 Mr UJ van der Walt. Brief CVs of all the directors appear on pages 12 to 13 of the integrated report. In order for this ordinary resolution number 5 to be adopted, the support of a majority of votes cast by linked unitholders present or represented by proxy at this meeting is required. 8 ORDINARY RESOLUTION NO.6 ISSUE OF SHARES Resolved that the directors be and are hereby authorised to allot and issue a portion of the unissued ordinary shares of R0.01 each in the capital of the company up to a maximum of 5% of the issued shares of the company, at such time or times to such persons, company or companies and upon such terms and conditions as they may determine, subject to the requirements of the Companies Act, and the JSE Limited Listing Requirements, provided that each ordinary share is linked to a debenture of R4.90 each, such authority to expire at the next annual general meeting of the company. In order for this ordinary resolution number 6 to be adopted, the support of a majority of votes cast by linked unitholders present or represented by proxy at this meeting is required. 9 ORDINARY RESOLUTION NO.7 REMUNERATION POLICY To consider and endorse, by way of a non-binding advisory vote, the company s remuneration policy as set out on pages 48 to 50 of the integrated report. In order for this ordinary resolution number 7 to be adopted, the support of a majority of votes cast by linked unitholders present or represented by proxy at this meeting is required. 10 ORDINARY RESOLUTION NO.8 IMPLEMENTATION OF RESOLUTIONS Resolved that any director of the company, and where applicable the secretary of the company, be and is hereby authorised to do all such things, sign all such documents and take all actions as may be necessary to implement the above ordinary and special resolutions. 111

116 Notice of annual general meeting (continued) In order for this ordinary resolution number 8 to be adopted, the support of a majority of votes cast by linked unitholders present or represented by proxy at this meeting is required. GENERAL NOTES A member entitled to attend and vote at the annual general meeting may appoint a proxy to attend, speak and vote in his or her stead. A proxy need not be a member of the company. All forms of proxy or other instruments of authority must be deposited with the transfer secretaries, so as to be received no later than 11:00 on the record date being, Tuesday 30 August Unitholders who are companies or other body corporates may, by resolution of its directors or other governing body, authorise any person to act as its representative at the annual general meeting. Unitholders who have not dematerialised their linked units and own-name dematerialised unitholders who are unable to attend the annual general meeting and wish to be represented thereat, must complete the attached form of proxy in accordance with the instructions therein and return it to the transfer secretaries, so as to be received no later than 11:00 on the record date being, Tuesday 30 August Unitholders who have dematerialised their linked units with a CSDP or broker, other than with own-name registration, should advise their CSDP or broker with their voting instruction in terms of the agreement entered into between them and their CSDP or broker. Unitholders who have dematerialised their linked units and wish to attend the annual general meeting must contact their CSDP or broker who will furnish them with the necessary authority to attend the annual general meeting. Unitholders who have dematerialised their linked units, other than with own-name registration, must not return the form of proxy to the transfer secretaries. Their instructions must be sent to their CSDP or broker for action. On a show of hands, every member present in person or every proxy representing unitholders, shall have only one vote, irrespective of the number of linked units he or she holds. On a poll, every unitholder present in person or represented by proxy shall have one vote for every linked unit held by such unitholder. A resolution put to the vote shall be decided on a show of hands unless, before or on the declaration of the results on the show of hands, a poll shall be demanded by any person entitled to vote at the annual general meeting and unless a poll is so demanded, a declaration by the chairman that a resolution has, on a show of hands been carried, or carried unanimously, or by a regular majority, or lost, and an entry to that effect in the minute book of the company, shall be conclusive evidence of the fact, without proof of the number or proportion of the votes recorded in favour of, or against, such resolution. If a poll is so demanded, the resolution put to the vote shall be decided on a poll. On behalf of the board Vukile Property Fund Limited Johann Neethling Company secretary Roodepoort 23 May 2011 Registered office Ground Floor Meersig 1 Building Constantia Boulevard Constantia Kloof 1709 Transfer secretaries Link Market Services South Africa (Proprietary) Limited 13th Floor Rennie House 19 Ameshoff Street Braamfontein

117 Summarised annual fi nancial statements CONDENSED CONSOLIDATED STATEMENT OF FINANCIAL POSITION as at 31 March Group Group R000 R000 UNITHOLDERS INFORMATION Assets Non-current assets Investment properties Investment properties Straight-line rental income adjustment (99 153) (85 715) Other non-current assets Intangible asset Straight-line rental income asset Development expenditure Furniture, fi ttings and computer equipment Available-for-sale fi nancial asset Financial asset at amortised cost Goodwill Current assets Trade and other receivables Cash and cash equivalents Investment properties held for sale Total assets Equity and reserves Non-current liabilities Linked debentures and premium Other interest bearing borrowings Derivative fi nancial instruments Deferred taxation liabilities Current liabilities Trade and other payables Short-term borrowings Current taxation liabilities Linked unitholders for distribution Total equity and liabilities

118 Summarised annual fi nancial statements (continued) CONDENSED CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME for the year ended 31 March Group Group R000 R000 Property revenue Straight-line rental income accrual Gross property revenue Property expenses ( ) ( ) Net profit from property operations Profi t from asset management business Corporate administrative expenses (25 509) (23 781) Investment and other income Operating profit before finance costs Finance costs ( ) ( ) Profit before debenture interest Debenture interest ( ) ( ) Profit before capital items (Loss)/profi t on sale of investment properties (14 798) Amortisation of debenture premium Goodwill written off on sale of properties (5 192) Impairment of intangible asset (49 935) (Loss)/profit before fair value adjustments (42 484) Fair value adjustments Gross change in fair value of investment properties Straight-line rental income adjustment (14 368) (7 041) Profit before taxation Taxation (25 488) (79 081) Profit for the year Other comprehensive income Cash fl ow hedges (11 436) Current period losses (16 616) (22 390) Reclassifi cation to profi t or loss Available-for-sale fi nancial assets current period losses (3 556) (6 486) Other comprehensive income/(loss) for the year (17 922) Total comprehensive income for the year Earnings per linked unit (cents) Diluted earnings per linked unit (cents) Reconciliation of group net profit to headline earnings and to profit available for distribution Cents per 2010 Cents per Group linked Group linked R000 unit R000 unit Attributable profi t after taxation Adjusted for: Debenture interest Earnings per linked unit Change in fair value of investment properties (78 494) (22.89) ( ) (96.62) Total tax effects of adjustments Change in goodwill on sale of subsidiary Loss/(profi t) on sale of re-valued properties (1 387) (0.46) Impairment of intangible asset Amortisation of debenture premium (2 519) (0.73) (1 361) (0.45) Headline earnings of linked units Straight-line rental accrual net of deferred taxation (18 407) (5.36) (4 979) (1.64) Adjustment for reduced distribution in respect of new issue of shares 3.29 Profi t available for distribution

119 CONDENSED CONSOLIDATED STATEMENT OF CHANGES IN EQUITY for the year ended 31 March 2011 Share Non- Re-valuation capital distri- of availableand share butable for-sale fin- Cash flow Retained R000 premium reserves ancial assets hedges earnings Total UNITHOLDERS INFORMATION Group Balance at 31 March (9 788) (16 854) Issue of share capital Dividend distribution (651) (651) (9 788) (16 854) Profi t for the year Change in fair value of investment properties ( ) Deferred taxation on change in fair value of investment properties and straight-line rental accrual (72 201) Share-based remuneration Transfer to non-distributable reserve (1 387) Other comprehensive income Revaluation of available-for-sale fi nancial asset (6 486) (6 486) Revaluation of cash fl ow hedges (11 436) (11 436) Balance at 31 March (16 274) (28 290) Issue of share capital Dividend distribution (824) (824) (16 274) (28 290) Profi t for the year Change in fair value of investment properties (92 862) Deferred taxation on change in fair value of investment properties and straight-line rental accrual (11 958) Share-based remuneration Transfer from non-distributable reserve (77 054) Other comprehensive income Revaluation of available-for-sale fi nancial asset (3 556) (3 556) Revaluation of cash fl ow hedges Balance at 31 March (19 830) (22 228)

120 Summarised annual fi nancial statements (continued) CONDENSED CONSOLIDATED STATEMENT OF CASH FLOW for the year ended 31 March Group Group R000 R000 Cash fl ow from operating activities Cash fl ow from investing activities ( ) ( ) Cash fl ow from fi nancing activities (75 644) Net increase in cash and cash equivalents Cash and cash equivalents at the beginning of the year Cash and cash equivalents at the end of the year

121 UNITHOLDERS INFORMATION Form of proxy Annual general meeting ( Vukile or the company ) (Incorporated in the Republic of South Africa) (Registration Number 2002/027194/06) ISIN: ZAE JSE Code: VKE NSX Code: VKN FOR USE BY CERTIFICATED LINKED UNITHOLDERS AND DEMATERIALISED LINKED UNITHOLDERS WITH OWN NAME REGISTRATIONS AT THE ANNUAL GENERAL MEETING OF LINKED UNITHOLDERS TO BE HELD IN THE VUKILE BOARDROOM, FIRST FLOOR, MEERSIG 1 BUILDING, CONSTANTIA BOULEVARD, CONSTANTIA KLOOF, 1709 AT 11:00 ON WEDNESDAY 31 AUGUST A UNITHOLDER ENTITLED TO ATTEND AND VOTE AT THE ANNUAL GENERAL MEETING IS ENTITLED TO APPOINT ONE OR MORE PROXIES TO ATTEND, SPEAK AND VOTE IN HIS/HER STEAD. A PROXY NEED NOT BE A MEMBER OF THE COMPANY. Linked unitholders who have dematerialised their linked units, other than with ownname registration, must inform their CSDP or broker of their intention to attend the annual general meeting in order to obtain necessary authorisations or alternatively, should they not wish to attend, they must advise their CSDP or broker as to what action they wish to take. This must be done in terms of the agreement entered into between them and their CSDP or broker. Linked unitholders who have dematerialised their linked units, other than with own-name registration, must not return the form of proxy to the transfer secretaries. Their instructions must be sent to their CSDP or broker for action. I/We (please print full names) of (please print address) being the registered holder of linked units in Vukile hereby appoint 1 of or failing him/her 2 of or failing him/her the chairman of the annual general meeting of linked unitholders as my/our proxy to attend, speak and vote or abstain from voting on my/our behalf at the annual general meeting of the linked unitholders to be held in the Vukile Boardroom, First Floor, Meersig 1 Building, Constantia Boulevard, Constantia Kloof, 1709, Gauteng at 11:00 on Wednesday 31 August 2011 and at any adjournment or postponement thereof, on the resolutions to be proposed at the annual general meeting as follows: Please indicate with an X the instructions to your proxy in the spaces provided below. In the absence of such indication, the proxy will be entitled to vote or abstain from voting as he/she sees fi t. (See notes overleaf). FOR AGAINST ABSTAIN Special resolution no.1: To authorise Intra-group fi nancial assistance Special Resolution no.2: To authorise the payment of directors and approve the following non-executive directors remuneration: 2.1 Non-executive directors retainer 2.2 Chairman s retainer board 2.3 Chairman s retainer audit and risk committee 2.4 Chairman s retainer human resource and nominations committee 2.5 Chairman s retainer investment committee 2.6 Meeting fees board 2.7 Meeting fees audit and risk committee 2.8 Meeting fees human resources and nominations committee 2.9 Meeting fees investment committee Ordinary resolution no.1: To receive and adopt the annual fi nancial statements for the year ended 31 March 2011 Ordinary resolution no.2: To re-appoint Grant Thornton as auditors Ordinary resolution no.3: To authorise the directors to fi x and pay the auditors remuneration Ordinary resolution no.4: To re-elect the following directors retiring by rotation: 4.1 Mr PS Moyanga 4.2 Mr MH Serebro 4.3 Mr UJ van der Walt Ordinary resolution no.5: To elect the following directors as members of the audit and risk committee: 5.1 Mr HSC Bester 5.2 Mr PJ Cook 5.3 Mr PS Moyanga 5.4 Mr MH Serebro Ordinary resolution no.6: To place the unissued shares under the control of the directors Ordinary resolution no.7: To endorse the company s remuneration policy Ordinary resolution no.8: To authorise the directors and company secretary to implement the ordinary and special resolutions and generally to act as my/our proxy at the said annual general meeting of the unitholders. Signed at this day of 2011 Signature Assisted by (where applicable) Tel No Cell No Fax No 117

122 Notes to the form of proxy Annual general meeting ( Vukile or the company ) (Incorporated in the Republic of South Africa) (Registration Number 2002/027194/06) ISIN: ZAE JSE Code: VKE NSX Code: VKN 1 This form of proxy shall serve as proxy for both shares and debentures in Vukile. 2 Each member is entitled to appoint one or more proxies (none of whom need be a member of the company) to attend, speak and vote in place of that member at the annual general meeting of linked unitholders. 3 Every person present and entitled to vote at the annual general meeting as a linked unitholder or as a proxy or as a representative of a body corporate shall, on a show of hands, have one vote only, irrespective of the number of linked units such person holds or represents, but in the event of a poll, a linked unitholder holding linked units will be entitled to one vote per linked unit held. 4 Please insert the relevant number of linked units and indicate with an X in the appropriate space on the face hereof, how you wish your votes to be cast. If you return this form of proxy duly signed but without any specifi c directions, the proxy may vote or abstain from voting as he/she thinks fi t. 5 A deletion of any printed matter and the completion of any blank spaces need not be signed or initialled. Any alteration or correction must be initialled by the authorised signatory/ies. 6 The chairman of the annual general meeting shall be entitled to decline to accept the authority of a person signing this form of proxy: (a) under a power of attorney; or (b) on behalf of a company,unless that person s power of attorney or authority is deposited with the transfer secretaries by no later than 11:00 on the record date being, Tuesday 30 August You may insert the name of any person(s) whom you wish to appoint as your proxy in the blank space(s) provided for that purpose. 8 The completion and lodging of this form of proxy will not preclude the member who grants this proxy from attending the annual general meeting and speaking and voting in person thereat to the exclusion of any proxy appointed in terms hereof should such member wish to do so. 9 Documentary evidence establishing the authority of a person signing this form of proxy in a representative capacity must be attached to this form of proxy unless previously recorded by the transfer secretaries of Vukile or waived by the chairman of the annual general meeting. The chairman of the annual general meeting may reject any form of proxy not completed and/ or received in accordance with these notes or with the Articles of Association and Debenture Trust Deed of Vukile. 10 Completed forms of proxy should be returned to the transfer secretaries, Link Market Services South Africa (Pty) Ltd, 13th Floor, Rennie House, 19 Ameshoff Street, Braamfontein, 2001, (PO Box 4844, Johannesburg, 2000) to be received no later than 11:00 on the record date being, Tuesday 30 August