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Mumbai Office Market: 2013 Review & Predictions For 2014

Despite the uncertain economic conditions, absorption of office spaces in Mumbai rose by 4.4 percent y/y to 7 million square feet in 2013, as against the 6.7 million square feet in 2012. As a result, vacancy fell to 22.9 percent in 2013 from 24 percent in 2012.

Ramesh Nair
Jones Lang LaSalle India

2013 Review:
• Increased Absorption
• Reduced Vacancy
• Rental & Capital Values Rise
• Stock Growth Slows
• CBD/SBD Lose Further Market Share

Despite the uncertain economic conditions, absorption of office spaces in Mumbai rose by 4.4% y/y to 7 million square feet in 2013, as against the 6.7 million square feet in 2012. As a result, vacancy fell to 22.9% in 2013 from 24% in 2012. Nearly 7.5 million square feet of new supply was added to Mumbai’s office stock in Mumbai in 2013 - an increase of 8.8% y/y compared to the 18% growth in stock in 2012. The total current office stock in Mumbai stands at 91 million square feet.

From a meteoric growth rate averaging over 8.0% since fiscal year 2004 until 2011, the Indian economy seems to have taken a breather. Against the potential GDP growth rate of 7-7.5% y/y (as defined by RBI), the growth rate has fallen sharply to 5.0% y/y as of FY2012-13. Economic indicators for the current year also suggest continued pain, with half yearly (Apr-Sept) growth recording merely 4.8% y/y.

The period 1H-FY14 also witnessed considerable deterioration of the INR against the USD and a sustained high CPI inflation of close to 10.0%. Full year GDP growth estimates for this year put the current fiscal year growth of not more than 5.0% y/y.

As always, such macro-economic factors have a direct bearing on the financial capital. While average growth of commercial real estate stock in Mumbai since 2004 to date has been 18.5% overall, this growth fell to 8.8% y/y during 2013. However, two facts help put these readings into the right perspective:

1. During this nine-year period, office stock in Mumbai has risen by more than five times, which would naturally lower incremental growth
2. Towards the middle of 2013, growth in stock of office space in Mumbai was still the fourth-highest among the major cities of the world. Also, the city’s office stock vacancy dropped to around 22.9% in 2013, as against 24% in the previous year.

These factors suggest that while the growth trajectory has lowered, the growth rate has only stabilised and shows resilience.

Capital values and rental values have risen marginally, with the former rising slightly faster than the latter. This rightly reflects the dichotomy that Indian economy faces currently – that of low demand (absorption) against a rising inflation. It is pertinent to mention that while growth in capital values was relatively stronger, some of it could merely be a pass-through of the rising input costs that developers have to bear. Construction costs in Mumbai have risen by around 24% over the last four years.

The Western Suburbs and Thane-Navi Mumbai witnessed the maximum rise in capital and rental values in 2013. At a city level, capital values for commercial spaces in Mumbai rose by 3.2 % y-o-y, led by the Western Suburbs and the Navi Mumbai/Thane belt, where growth was 7% and 6% respectively. At a city level, Mumbai office space rents appreciated by around 2.8% y-o-y. Rentals appreciated by 5% in the Western Suburbs and by 4.5% in Navi Mumbai and Thane.

Greater Dispersion Of Office Space Across Various Sub-markets
As of end-2013, Mumbai continues to have the largest stock of office spaces with 25% of the total office space across the top seven cities.

Like in most other cities, Mumbai has also witnessed erosion of market share of the Commercial Business Districts (CBD), with more and more companies favouring suburban locations. Over the last 10 years until end-2013, the share of Mumbai’s CBD has decreased from occupying 30% of the city’s total office space in Mumbai to merely 5% as of 4Q-2013. While the trend itself is common across various cities in India (with differing severity), what is uncommon in Mumbai’s case is that that its CBDs loss of share has been a gain for almost every other sub-market in the city.

With this level of dispersion, the city’s office landscape offers a level of variety that suits the preferences of diverse sets of industries. Where Mumbai’s largest office constituents comprised of Banking, Financial and Insurance (BFSI) sectors in the past, it is now seeing an increasing presence of the IT-ITES sector - known for its quest for low-cost and emerging destinations. BFSI occupancy share in Mumbai has fallen considerably, from over 50% in 2007 to around 27% currently, while the share of sectors such as IT services, Manufacturing, Pharma, Media / Entertainment and Professional Services has increased.
This transition presents a unique opportunity for the city to attract sectors that were hitherto under-represented. However, it also exposes the immediate need for the city to plan out significant improvement in its infrastructure that could enable faster mobility of people between various sub-markets. This has, in fact, been happening over the past decade, and Mumbai’s commercial real estate developers have responded with an increasing supply of stock in emerging locations such as Thane and Navi Mumbai, the Eastern Suburbs, etc.

As of end-2013, the Eastern Suburbs sub-market (which includes Powai, Vikroli and Kanjur Marg) occupies office stock which is equals or exceeds that of more established sub-markets such as SBD-BKC and SBD-Central. The markets with the largest stock are Thane/Navi Mumbai and SBD North, with 20 million and 18 million square feet respectively. 
Demand Polarisation: Increased Leasing In Selective Sub-Markets
As against Mumbai’s annual absorption growth of 4.4% in 2013, the three sub-markets of CBD, SBD North and Western Suburbs witnessed increased leasing activity. The prolonged slowdown in real estate momentum provided several corporates with the opportunity to consolidate or re-group operations.

This led to polarisation of demand for office space across various sub-markets in Mumbai, in line with the trend observed in other Indian cities. For instance, while the BFSI sector always showed high preference for the CBD, SBD-BKC or SBD-Central sub-markets, its back-end operations (and also those of the IT Services sector) has increasingly preferred space in the suburbs (particularly the Western Suburbs). This has helped raise demand for Grade A office space in the suburban markets, where supply of such quality space is limited. Year 2013 witnessed a rise in office consolidation activity, which benefited absorption growth in the West suburbs.

Vacancy Drops
Office space vacancy in Mumbai dropped to 22.9% in 2013, contributed by a drop in vacancy in SBD-Central, Western Suburbs and Thane-Navi Mumbai. While the Western Suburbs witnessed a sharp rise in take-up of office space during the year, the other two sub-markets witnessed a drop in supply growth amidst a largely stable absorption rate. However, vacancy rose in the Eastern Suburbs and CBD during the year. In spite of the drop, vacancy still remains high in Thane/Navi Mumbai and SBD North.

2014 Outlook:
• Overall stock will rise 7.4%
• Vacancy will fall 0.5-1.0%
• CRE Investment will increase
• 2014 elections can be a game-changer 

In 2014, the shortage of high-quality office spaces in Mumbai will intensify. However, overall office stock in the city is expected to rise by 7.4% y/y in 2014. The sub-markets which will see highest rise in stock of office space include the West Suburbs, SBD North and East Suburbs (in that order). The CBD, SBD-Central and Thane-Navi Mumbai will witness the least or very moderate growth in stock.

With business sentiments unlikely to change drastically in the near-term, we expect absorption to remain slow, yet growing. Therefore, rental and capital values will continue to grow moderately. Capital values (4.5% y/y) will continue to rise faster than rental values (3.4% y/y) during the year. Slowing growth of stock as against moderate absorption level will lead to vacancy falling by 0.5%-1.0% in 2014.

Investment volumes are expected to go up in 2014, driven by availability of relatively attractive office options that cater to a wider cross-section of occupiers ranging from BFSI to IT/ITES to KPOs and consulting firms.

Overall, the investment market will do better in 2014, with a substantial weight of capital targeting office real estate (especially Grade A and trophy assets). Strong investor demand for prime office assets and the lack of new supply of core investment options in the primary markets will result in further yield compression. Debt capital availability remains healthy for core assets, but inches back for non-core assets.

Events that could be real game-changers for Mumbai’s commercial real estate market are the general elections scheduled in the 2Q-2014, and RBI’s announcement of new banking licenses (due early 2014). Both these events could radically impact business sentiment across the nation. Mumbai, being home to the largest agglomeration of BFSI companies, would witness positive momentum as more banks are allowed to operate in India.

First Published on Jan 2, 2014 07:26 pm
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