MUMBAI: Behind the glass facade of the swanky new office buildings in Mumbai’s Lower Parel area , the light is fading. Many of these buildings, touted as the most coveted piece of real estate in the country’s financial capital, remain nearly half empty despite being ready for almost a year now.
Office rentals have now fallen to almost one-third (down 36%) of what it was three years ago. What was available for Rs 275 per sq ft three years ago is now on offer for Rs 175 per sq ft. Yet, there are few takers and, despite plunging rentals, the area is still witnessing a building boom.
Huge office complexes tower over shanties, slums and cacophonic traffic. Dozens of small shops, which used to cater to mill workers a few decades ago, are still around, sitting cheek by jowl with gleaming showrooms selling high-end furniture. Cars, bikes honking furiously clog the narrow roads, while on weekends, luxury sedans queue up to enter one of the many shopping complexes that dot the area.
The entertainment industry is doing very well, the restaurants are full and bowling alleys and dance floors are packed. But, it is the office space developers who are feeling the pinch of the economic slowdown. In the past four years, Lower Parel alone has seen launch of nine major projects, with office space of nearly 8 million sq ft, more than the entire Nariman Point, long the hub of Indian businesses. The total office space in-place at Nariman Point is 6 million sq ft, which was absorbed and used over 40 years, and till 2005 that was enough to sustain the city’s business.
Developers Offer Discounts
Now, the city has a total 85 million sq ft ready and under-construction office space. “Do we have tenants ready for this kind of supply in the shortterm ? The answer is ‘no’ ,” says Aniruddh Wahal, director – transaction services at property consultancy firm DTZ. “Certainly , not at the speed witnessed during 2005-2008 , which set the expectation for this breakneck pace of development.” Given the oversupply , developers have now lowered rentals while some are also looking at outright sales of buildings as against leasing them.
One such player is Alok Realtors, the real estate arm of Alok Industries. Alok had bought a commercial building from Peninsula Land four years ago and has been trying to sell it completely. Only around 30% of this 615,000-sq-ft ready building has been leased so far. The rest is vacant. “Developers stuck with inventory here are ready to offer big discounts to attract tenants and buyers. Some of them are even ready to negotiate the deal close their cost price,” says Ashok Kumar , MD of international property consultancy firm Cresa Partners.
Lower Parel, of course, isn’t an isolated case. Other places such as Nariman Point and Andheri are also hobbled by poor offtake , with rents falling by up to 30%. The only exception is Bandra-Kurla Complex (BKC), where rents have risen 40%, but experts say the peak may have been attained here. Key buildings that have major vacancy levels in Lower Parel are Peninsula Business Park A and B where 83% and 70% space is yet to be leased, respectively.
Marathon Futurex, of which so far only first phase is ready, also has nearly 92% vacancy, while One Indiabulls and Indiabulls Finance Centre have 15% and 30% vacancy, respectively , showed data from DTZ. Although Lower Parel’s problem may be amplified by the sheer size of the oversupply, the scenario is not very different across Mumbai . According to property brokers , between 2003 and 2005, when foreign direct investment started flowing into the economy, the demand for office space grew manifold , driving developers to build more.
Availability ratio for commercial space was at a record high of 23% in the quarter ended March 31. During this quarter, Mumbai witnessed new supply of approximately 2.65 million sq ft, taking the overall office stock in the city to over 85 million sq ft. The result: Falling rental values, but relatively stable capital values. In the quarter ended March 2012, rental values for grade ‘A’ building in Nariman Point in South Mumbai, fell from Rs 425 per sq ft three years ago to Rs 325 per sq ft a month, off its peak of Rs 450 per sq ft in 2008.
However, capital values here are still at Rs 33,000 per sq ft, not very far from peak rate of Rs 35,000 per sq ft in 2008, says a report by DTZ. “Nariman Point has actually gone down significantly from its peak level as there is no deal taking place at all. It’s a frozen market , but people are not writing it off as a ghost market yet due to its connectivity, social infrastructure and prime residences,” Wahal says.
Lower Parel’s central location advantage and availability of large mill land parcels caught the fancy of realty developers in the early part of the last decade, when the public sector National Textile Corporation began selling old mill land in the heart of the city. Rising demand for commercial space and cost arbitrage compared with expensive Nariman Point – the main office district in the city – with limited supply, fuelled a construction boom.
There was demand from both Indian and foreign companies as they sought to expand their businesses . If Mumbai was to become Shanghai, the transformation of Lower Parel into a world-class commercial hub seemed the first big step. “We have to improve the infrastructure and carrying capacity first and then allow further development , not the other way round, the way it has been done so far. Forget about being an international finance centre, even the basic needs of citizens here have not been taken care of,” says Mumbaibased urban planner Chandrashekhar Prabhu.
According to him, Mumbai scores the least in terms of amenity space with only 0.03 acre per 1,000 citizens against 12 acre in London, 17 acre in Washington D.C. and 15 acres in Moscow. The office complexes in the area are spacious, comfortable and provide everything that a business executive needs. Outside, the picture is very different. Squalid shanties, narrow roads, massive traffic jams are normal sights that greet visitors to the area. The amount spent on infrastructure is not anywhere close to the figure spent on property development.
Subhankar Mitra, head – strategic consulting (west) Jones Lang LaSalle India, says, “Since 2005, a whopping Rs 27,600 crore has been invested in land in Mumbai, excluding the confidential transactions and investments made into slum and other redevelopment projects. “Investments in mega infrastructure projects amount to only 60% of investments in prime land in the same period,” he added. “Existing roads here do not have the potential to be expanded. Pressure on infrastructure is going to be huge once all the planned development comes through and gets occupied. One will have to be very creative in handling this issue and strictly enforce regulations ,” says Pranay Vakil, chairman of Knight Frank India.
Property consultants and some developers believe that the wrong kind of oversupply has exacerbated the problem. “Unless it’s required for a corporation’s headquarters, tenants do not need large floor plates of over 50,000-60,000 sq ft for commercial office.
These kind of floor plates are good for an IT company, which typically look for space with around Rs 100 per sq ft a month kind of rentals,” says a realty developer who did not wish to be named. According to him, this is the reason why some developers who built large floor plates are now looking at reconfiguration of those with splitting them into relatively smaller offices to attract customers.
Apart from this, some developers are also offering discounts. Developers like Indiabulls Real Estate are negotiating large deals by offering discounts on the going rate of Rs 150 per sq ft for its buildings at Lower Parel. The last major deal at one of its buildings took place at Rs 125 per sq ft a month against Rs 155 a year ago.
Hubtown, erstwhile Ackruti City, recently came up with an installment scheme at three nearly completed projects in Andheri and Jogeshwari. The scheme allowed a buyer to pay 40% as initial payment and the rest at a rate of 1% interest over the next 60 months.