Mumbai Office Real Estate: 2013 Review & 2014 Outlook
By Ramesh Nair, COO – Business, Jones Lang LaSalle India says Mumbai' office real estate will see office stock rise by 7.4%, but vacancy will only go down by 0.5-1% in 2014.
Mumbai Office Realty in 2013
- 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 (y-o-y) to 7 million square feet in 2013, as against the 6.7 million square feet in 2012. Office space 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-o-y compared to the 18% growth in stock in 2012. The total current office stock in Mumbai stands at 91 million square feet.
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.
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.
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.
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.
Mumbai Office Market in 2014
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 stock will rise 7.4%
- Vacancy will fall 0.5-1.0%
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.