by Mr.
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% year on
year to 7 million square feetin 2013, as against the 6.7 million square feet in
2012.
 |
| Ramesh Nair, COO – Business, Jones Lang LaSalle India |
As a result, vacancy
fell to 22.9 % in 2013 from 24 % in 2012. Nearly 7.5 million square feetof new
supply was added to Mumbai’s office stock in Mumbai in 2013 - an increase of
8.8 % year on year 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% 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 % year on year (as defined by RBI), the growth rate has fallen sharply
to 5 % year on year as of FY 2012-13. Economic indicators for the current year
also suggest continued pain, with half yearly (April - September) growth
recording merely 4.8 % year on year.
The period 1H-FY14
also witnessed considerable deterioration of the INR against the USD and a
sustained high CPI inflation of close to 10%. Full year GDP growth estimates
for this year put the current fiscal year growth of not more than 5 % year on
year.
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 % year on year 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 slightlyfaster 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 % year on year, led by the Western Suburbs and the Navi Mumbai / or
Thane belt, where growth was 7 % and 6 % respectively. At a city level, Mumbai office space rents
appreciated by about 2.8 % year on year. 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
thetrend itselfis 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 suitsthe
preferences of diverse sets of industries.Where Mumbai’slargest 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 /
Entertainmentand Professional Services has increased.
This
transitionpresents 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 planout 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 KanjurMarg)
occupies office stock which is equals or exceeds that ofmore 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:
IncreasedLeasing 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 GradeA 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. Inspite of the drop, vacancy still remains high in Thane/Navi Mumbai
and SBD North.
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