By Mr.
Ramesh Nair, JLL India
Mumbai office real
estate saw absorption of 66 lakh square feet - down from 96 lakh square feet in
2011, reflecting a combination of lukewarm economic growth, lower employment
generation and an overall decline in corporate buoyancy.
Transaction activity
from the BFSI (Banking, Financial Services and Insurance ) sector was down,
with many banks focusing on workplace strategies to drive a more intense use of
existing space.
Sectors such as Pharma
& Media continued to thrive, resulting in a few big ticket transactions
& helping to boost activity. The last three (3) years saw significant
levels of new office supply, providing a greater selection for tenants and
resulting in a narrowing of the rent gap between the CBD markets and the
suburbs.
Mr. Ramesh Nair, JLL India |
Expansion demand was
subdued in 2012 on the back of corporate caution & slower economic growth,
but relocations and consolidations led to buoyancy in leasing activity.
Postpone Real Estate
Decisions..!
With economic
uncertainty continuing to weigh down on current and future corporate demand
levels, the global debt crisis combined with evidence of weakening economic
growth caused corporates to postpone real estate decisions & delay
implementation of longer-term strategies. This impacted transaction volumes in
2012.
Capital values of
commercial real estate in Mumbai grew at a much faster pace than rents in 2012
- a trend that is likely to prevail in 2013 as well.
Capital values in
different sub markets appreciated at about 5 %, except in the CBD, SBD North
and Eastern suburbs, where they remained largely flat during 2012.
At a city level,
Mumbai office space rents appreciated around 3 % year on year. Rentals
appreciated in SBD Central, SBD BKC, Western Suburbs & Thane and Navi
Mumbai.
The CBD, SBD North
and Eastern Suburbs remained flat through 2012.
Rentals in the
Eastern suburbs remained stagnant due to increasing completions in the other
suburban counterparts.
The manufacturing
& industrial sectors, followed by IT / ITeS sector, led transaction
activity during 2012 with more than 50 % representation. BFSI contributed to
nearly 20 % of the leasing activity, followed by other sectors such as service
providers and consulting firms.
Micro
Markets ..!
Rents in most of
Mumbai’s micro-markets stabilised in 2012, although vacancies remain high. Most
of the micro markets are now showing convincing indications of having bottomed
out. Good quality, modern spaces in good locations are being absorbed.
One element hindering
a faster decline in vacancy is the release of second-hand space. Prime yields
reduced in all micro markets on the back of robust investor demand for
high-quality, leased-out core assets.
Predictions
For 2013..!
Given the typical
time-lag between an upturn in economic fortunes & leasing market activity, a full fledged
recovery in the leasing volumes of Mumbai’s office property market in early
2013 seems unlikely.
Heading into 2013,
doubts over future economic conditions may continue to dampen corporate demand.
By the middle of
2013, some clarity around the Europe debacle and the near term fiscal situation
in the US could lead to vibrancy in the market.
Development activity
has reduced drastically given the lack of liquidity and reduction in pre-lets.
While the overall Mumbai office property market continues to be
tenant-favourable, demand is still concentrated on just a few buildings in each
micro market.
The range of
single-ownership prime buildings is more restricted than the overall vacancy
figures would suggest.
Recovery is expected
pick up pace in 2013. The decline in vacancy rates, as well as robust
absorption supported by the sluggish development response will cause rentals to
increase in various micro markets in 3 Q and 4 Q 2013.
Occupier Scenario..!
In the medium term,
large tenants in the prime office space markets of Mumbai will face a
supply-constrained marketplace with few big blocks of contiguous quality
commercial space available.
However, Mumbai
office real estate markets across the city will continue to be
tenant-favourable at least for the first two quarters, with occupiers
benefiting from an increased choice of new high-quality premises & reduced
occupancy costs.
As tenants have
increasingly sought to ‘right size’ their footprint, focus on enhanced space
efficiencies and eliminate redundancies, they are concentrating on not just
‘quality’ but also on efficiency.
Corporates are
currently in a holding pattern, awaiting stronger signals of sustainable demand
growth. There has been a strong uptick in the preference for shorter lease
terms.
Although transaction
activity has not grown, corporate real estate teams within major corporations
continue to develop transformative occupational and portfolio strategies,
supported by enhanced real estate data and metrics.
At the heart of these
strategies are workplace strategies that contribute to cost reduction, bolster
worker productivity & support talent acquisition and retention. These
strategies will play out in the market over the medium term.
Vacancy
Scenario..!
Vacancy of office
properties in Mumbai, which is currently at 22 %, will begin edging downwards
from 4 Q 2013.
This vacancy
reduction, when it takes place, will be the first decrease since 2006.
Demand
Scenario..!
The absorption
forecast for 2013 will be 10 to 12% above that of 2012 as corporate occupiers
focus on consolidation to take advantage of the market bottoming out. Leasing
activity is expected to go up in the last two quarters of 2013. Growth will remain slow until the
economic recovery filters through and generates more pronounced job growth and
expansionary demand. Most demand is coming from consolidation and relocation
rather than expansion.
Supply
Scenario..!
The development
pipeline is reducing, with new completions of Grade A office buildings likely
to be restrained in 2013 and 2014. New office launches and deliveries (except
projects which did not get completed in 2012) will be at a low level, and
construction is not likely to pick up until 2015.
Any significant
improvement in occupier demand will do nothing but add to the pressure on
supply, thereby stimulating increase of rents & capital values in Grade A
buildings within the prime locations.
The completion rate
for Grade A office projects over the next two (2) years will be much lower than
in the preceding three years. Many speculative completions will not see the
light of day till 2015 - 2016. A substantial amount of new supply will become
available in select markets only in 2015.
The trend of
completion of high quality new projects pushing up Grade A vacancy levels and
providing tenants with greater bargaining power will reduce.
With banks having
slowed down lending activities over the past 2 years, debt remains a constraint
and not many new launches are expected in 2013 & 2014. In some markets,
projects at a launch stage have been converted for residential or hotel uses.
Capital
And Rental Values Scenario..!
Rents in different
sub-markets of Mumbai are expected to record reasonable appreciation during
2013, and at a faster pace than in 2012.
Given the basic
scarcity of available good-quality, right-sized Grade A office stock in the
city’s prime locations, rentals are expected to go up by around 6 % in 2013.
The average capital
value appreciation is expected to be about 7 % year on year during 2013, with
most major markets in Mumbai seeing increases (largely in tandem with rentals).
This offers some cause for optimism but economic headwinds do persist, notably
in terms of economic growth.
SBD Central and SBD
KKC (Bandra Kurla Complex) are expected to record marginal rental increases at
a sub-market level during 2013.
Due to infusion of
investor supply into the lease market in select sub-markets such as SBD
Central, SBD North and Navi Mumbai, there could be marginal softening of
rentals at a project level in non prime projects in 2013.
Investment
Scenario..!
Investment volumes
are expected to go up in 2013. Both the Eastern & Western suburbs of
Greater Mumbai as well as Thane & Navi Mumbai are likely to witness rental
appreciation in the range of 6 % year on year during 2013.
The drivers behind
this will be 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 2013, with a substantial weight of capital
targeting office real estate (especially Grade A & trophy assets) thereby
increasing investment volumes.
Strong investor
demand for prime office assets and lack of new supply of core investment
options in primary markets will result in further yield compression. Debt capital
availability remains healthy for core assets but inches back for non-core
assets.
To
Summarize..!
In 2013, shortage of
quality office spaces in Mumbai will intensify. It will once again become clear
that commercial property in Mumbai is seen as attractive and somewhat ‘safer’
option as against other asset classes and geographies around India.
When the recovery
does finally pick up in earnest, landlords are likely to be more aggressive.
The State Government
needs to proactively position and market Navi Mumbai & Thane as alternate
IT destinations to cities like Bangalore, Chennai & Pune to create more
jobs and boost demand for office space there. The trend of corporates beginning
to buy as against leasing is expected to increase.
JLL India expect the
IT and manufacturing sectors to contribute equally to the leasing activity in
the coming year, with a cautious and selective expansion of BFSI majors during
2013.
About the author Ramesh Nair, Managing Director – Mumbai,
Jones Lang LaSalle India
Reach at +91 22 6620
7575, ramesh.nair@ap.jll.com
Src: Jones Lang LaSalle India Real Estate Compass
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