JM Financial: Unitech: Commercial leasing still subdued, portfolio value lowered 39%

value revised downwards by 39%: Unitech Corporate Parks
Plc (UCP) held a conference call this afternoon to discuss their Mar’10 result.
Unitech Ltd holds 40% economic interest in UCP’s portfolio of c.21mn sq ft
and in Jul’10 had indicated a possible offer for balance stake in UCP at
31pence per share, which could entail a cash outflow of `7-8bn at the offer
price. The portfolio is spread across 6 assets (5 SEZs and 1 IT Park) located in
Gurgaon, Noida/Greater Noida and Kolkata. Broadly, UCP has lowered the
portfolio value of its assets from GBP457.4mn (as at Mar’10) to GBP281.3mn
(Jul’10), based on revised valuation undertaken by Knight Frank. The
downward revision reflects current market conditions, provisions of the Direct
Tax Code on SEZs and a revised construction schedule. Management
explained that one significant factor that impacted the portfolio value was the
re-phasing of construction timelines by ‘many years’ (some of them by as
many as 7 years). Besides, the company has also adopted a new methodology
for valuing partially constructed developments and undeveloped land,
switching from DCF basis (assuming build-out of developments as per
estimated completion dates) to the use of comparable land values plus cost
of construction incurred to date.
 UCP’s commentary highlights continuing slackness in commercial leasing
environment: UCP’s management highlighted that on the ground, there
exists a lot of uncertainty in the commercial leasing environment, with
tenants taking an extremely cautious approach before committing leases.
Plus, vacancy levels are high in Gurgaon and Noida. UCP highlighted that it
took 4 years for it to lease out c.3mn sq ft of space (out of its total portfolio
of 21mn), which is way off its original target. While this, in some way,
contrasts the general expectation of a stronger imminent recovery in the
leasing environment, we believe UCP’s commentary highlights a need to
exercise some degree of caution whil e projecting a case of strong recovery of
the commercial leasing segment.