India's Office Market Will Continue to Struggle in 2012

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For those who thought 2011 was a discouraging year for India's largest commercial market, Mumbai; 2012 will not bring any obvious reasons for cheer. Demand will be marginally lower than in 2011, with IT and ITES companies becoming even more cautious on account of the expected reduction in IT spend by US and European companies. The uncertain economic environment will continue, leading to reduced employment growth and therefore lower fresh commercial space absorption. Tighter lending standards for commercial construction will not help, either.

On the brighter side, these market conditions will continue to favor tenants in most of Mumbai's micro-markets by ways of a larger bouquet of options, rational pricing and various concessions. The market conditions are optimal for consolidation and relocation, and many Mumbai-based occupiers will avail of this option throughout 2012.

Office space rentals will show a further - though marginal - drop in the first half of the year as infusions of additional stock lead to higher vacancies. One direct result of this will be a sharp reduction in speculative commercial projects. The continued yield compression will cause a number of HNIs will become active buyers of rent-producing and vacant office spaces in the city.

Also, demand for smaller offices in Grade A projects is expected to increase as more small and medium sized Indian corporates take advantage of the rationalized pricing and buy space in them.

Ramesh Nair, Managing Director of Jones Lang LaSalle India tells World Property Channel, "Mumbai's retail real estate sector looks buoyant in 2012. We will see some of the city's older malls being repositioned, refurbished and re-tenanted. Vacancy levels will increase in several poorly-designed and unfavorably located malls. Interestingly, the redevelopment of several old residential societies in the Island city will give rise to an unexpected availability of more high street retail space. More store-within-store formats, drive-through lanes and pick-up zones will be implemented in 2012."

Mumbai's retail space landlords are taking a progressive view of the sector's future. They have already begun to express greater willingness to opt for a revenue-sharing arrangement, rather than insisting on pure rental-based deals. Despite the political reverberations, we expect FDI in multi-brand retail to be officially allowed in the second half.

Nair further comments, "In 2012, Mumbai will underscore its status as a relatively safe haven for Indian core real estate. HNI investors will re-enter the market in a big way, and the increased HNI investment volumes are likely to put pressure on core cap rate. The market could see short-run fluctuations as investors alternate between seeking out more risk and briefly pulling back. Overall, it is the financial market volatility which will continue to drive sentiment swings.

"Debt capital availability is likely to increase for core investments in the financial capital; however, financing challenges will continue for high-risk, opportunistic real estate investments. With stiffening of lending policies and standards, debt will become more expensive and many city developers will reconsider the private equity route for their funding needs.

"There is every indication that in 2012, a number of distressed projects by smaller developers will be acquired by large and medium-sized developers at sub-valuation prices. Some developers are gearing up to sell their non-core land and divest their stakes in non-core businesses such as hospitality and retail."