Mumbai office property market looks for a turnaround in 2013

Though doubts over future economic conditions in 2013 may continue to dampen office space demand in Mumbai, by the mid of 2013 the absorption is likely to be 10–12% above that of 2012 as corporate occupiers will take advantage of the bottomed out market, according to a survey by JLL India, which further states that, “Most demand is expected to come from consolidation and relocation rather than expansion.”

A full-fledged recovery in leasing volumes in early 2013 seems unlikely as there is generally a time-lag between upturn of the economy and leasing activity, the report observed. While the overall office market continues to be tenant-favourable, demand will concentrate on just a few Grade-A buildings in each sub-market. Growth will remain slow until the economic recovery filters through and generates more pronounced growth in employment and expansionary demand, Jones Lang Lasalle’s monthly news monitor ‘Pulse’ noted.

Capital values grew faster than rents during 2012 and this trend is likely to continue in 2013. Capital values appreciated by around 5% in SBD Central, SBD BKC, Western Suburbs and Thane & Navi Mumbai in 2012. Meanwhile capital values remained largely flat in CBD, SBD North and Eastern Suburbs. Rentals in Eastern Suburbs remained stagnant due to increasing completion from the other suburban counterparts.

The rental gap between the CBD sub-markets and the suburban sub-markets were seen to be narrowing in 2012. At an overall city level rents appreciated by around 3% y-o-y in 2012 as most sub-markets have almost bottomed out. Prime yields reduced in all sub-markets on the back of robust investor demand for high-quality core well-let assets.

In 2013, shortage of quality space will intensify. Commercial property in Mumbai will continue to be seen as attractive and ‘safer’ investment option compared with other asset classes and geographies around India. Landlords are likely to become more aggressive when recovery finally picks up. The state government needs to proactively position and market Navi Mumbai and Thane as alternate IT destinations to cities such as Bangalore, Chennai and Pune to create more jobs and boost demand for office space.

The trend of corporates beginning to buy as against leasing isexpected to increase. We expect IT and manufacturing sector to contribute equally to the leasing activity in the coming year with a cautious and selective expansion of BFSI majors during 2013.

Occupier Behaviour

Large office space occupiers are expected to face a supply constraint in prime sub-markets of Mumbai due to less availability of good quality space in the medium term. However, overall office market across Mumbai will continue to remain tenant-favourable until 1H13 as occupiers will benefit from increased availability of new high-quality premises and reduced occupancy costs. However this trend is expected to shift in 2H13 as supply of Grade A space will be restrained. As tenants have increasingly sought to 'right size' their footprint and target enhanced space efficiencies and eliminate redundancies, they have flocked not just to 'quality', but increasingly to 'efficiency'. Corporates will continue to post pone their real estate decisions and shorter lease terms will be more preferred. Corporate real estate teams within major corporations will continue to develop transformative occupational and portfolio strategies, supported by enhanced real estate data and metrics. At their heart will be workplace strategies that not only contribute to cost reduction but also bolster worker productivity and support talent retention. These strategies will play out in the market over the medium term.

Supply & Vacancy

The last 3 years has seen a significant increase in new office space supply that provided tenants with greater selection options. However, development activity will reduce drastically given the lack of liquidity and reduction in pre-leasing activity in 2013. Launch ofnew office projects will reduce and construction is not expected to pick up until 2015 as debt remains a constraint. Few projects at launch stage have been converted into residential or hotel uses in certain sub-markets of Mumbai. Therefore Grade A office space supply will remain restrained in 2013 and 2014. A significant improvement in occupier demand under such circumstances will add pressure on the supply, thereby stimulating increase of rents and capital values in Grade A buildings within the prime locations. Vacancy which was at 22% in 4Q12 will finally begin to edge downwards starting 4Q13 due to the increase in leasing activity amidst restricted supply. The vacancy reduction when witnessed will be the first decrease since 2006.

Rents and Capital Values

The rents in different sub-markets of Mumbai are expected to record reasonable appreciation during 2013, albeit at a faster pace than 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 in 2013 by around 6%. The average capital value appreciation is expected to be around 7% y-o-y during 2013. Investment volumes are expected to go up in 2013. Both Eastern and Western suburbs of Greater Mumbai along with Thane and Navi Mumbai are expected to witness a rental appreciation. SBD Central and SBD BKC are expected to record marginal rental increases at a sub-market level during 2013.

Investment Sentiment

The investment market will do better in 2013, with a substantial weight of capital targeting office real estate especially Grade A and trophy assets. 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 will remain healthy for core assets and inch back for non-core assets.