Mumbai sees uptick in SEZ leasing following denotification

REITs have been key beneficiaries of the resurgence in leasing in SEZs located in the Mumbai metropolitan region

After three straight years of decline, leasing in premises notified as special economic zones (SEZs) in the Mumbai Metropolitan Region (MMR) increased in the first nine months of 2024. This came in the wake of the union government allowing floor-wise denotification of SEZ-notified buildings, amid uncertainty about the future of SEZs.

Potential occupiers had turned away from SEZs due to the government instituting sunset clauses in SEZ norms that had phased out tax benefits for lessors. 

According to data shared by real estate consultants Cushman & Wakefield (C&W), leasing in SEZ-notified buildings in the Mumbai metropolitan region (MMR) was around 1.42 million square feet for the first nine months of the ongoing financial year, significantly higher than the 8,30,000 square feet leased in 2023. By the end of 2024, C&W estimates that leasing in SEZ-notified buildings in MMR will go up to 1.8 million square feet, higher than pre-pandemic levels.

The main beneficiaries of this increase have been the real estate investment trusts (REITs), which hold large portfolios across a number of micro-markets, such as Powai, along  Thane-Belapur road, and in areas such as Airoli and Ghansoli.

Mindspace Business Parks REIT has a large portfolio of SEZ-notified buildings in Airoli, which have seen significant leasing momentum, while the Singapore-listed CapitaLand India Trust, backed by real estate giant CapitaLand, has SEZ-notified office space in Ghansoli.

In Mumbai's upscale suburb Powai, Brookfield India Real Estate Trust-owned SEZ buildings in Hiranandani Gardens have also seen significant leasing, according to the report.

"Fortunes of SEZ landlords changed when the government announced partial denotification of SEZ buildings... This allowed the landlords to designate up to 50 percent of the total built-up area as non-SEZ space, or Domestic Tariff Area (DTA)," said Gautam Saraf, Managing Director of Mumbai and New Business at C&W.

The partial denotification of SEZ buildings took effect in December 2023, after efforts to replace the Special Economic Zones Act, 2005, with the Development of Enterprise and Service Hubs (DESH) Bill, came to nought. The NITI Aayog had raised objections over various customs provisions in the bill, and some state governments had also flagged that the new bill may fall foul of provisions in the seventh schedule of the Constitution, which deals with the allocation of powers between the union government and the states.

Despite the recent traction in leasing, vacancies in SEZ-listed buildings for the July-September quarter remains higher, at 18 percent, against the overall vacancy in the Mumbai market, of 16 percent. However, vacancies in SEZ buildings in Mumbai have significantly reduced over 2023, when it was 22 percent, according to the report.

Technology firms were the leaders in terms of leasing in SEZ-notified buildings in MMR, according to C&W, but professional services firms too saw a sharp rise in the leasing pie. Global Capability Centres (GCCs) also drove some of the demand, added the report.