Mumbai Office Market Slows in Q-1 as Corporate Tenants Review Annual Budgets

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Based on a new report by global real estate firm Jones Lang LaSalle, Mumbai's commercial office markets moderated slightly in the first quarter of 2011.

Abhishek Kiran Gupta, Head - Research & REIS of Jones Lang LaSalle India said, "The year 2011 will be a strategic window of opportunity for occupiers and investors, when rents and capital values in most of the micro-markets would be at their cyclical bottom and remain undervalued. Several markets have already shown signs of steady revival in terms of strengthening of demand for office space as well as an increase in capital market transactions. We forecast the absorption of office space across the top seven cities of India to grow nearly 1.8 times from 19.6 million sq ft recorded in 2009 to 35.7 million sq ft in 2011."

Gupta further commented, "Several markets which were dormant during 2010 with respect to property rates will register an appreciation in valuations. The prime markets of Mumbai, Delhi and Bangalore are ahead in the property cycle in terms of transactional volumes and should be the first to register rental growth in 2011. However, the oversupplied suburban markets might still feel the pressure of inadequate demand levels and will be late to recover. Adequate volumes of office supply will keep hitting the markets every quarter, keeping the segment interesting for occupiers as well as investors."

Key highlights from Jones Lang LaSalle report include:

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Class A Office Markets

Demand

After recording significant leasing in 4Q10, Mumbai city witnessed moderate transaction activity in 1Q11 as the major office occupiers of India Inc awaited the impact of budget on their corporate real estate strategy for the next fiscal year. However, the city's office market witnessed transactions totaling 827,105 sq ft (76,841 sqm) in 1Q11.

In addition to the banking, financial services and insurance (BFSI) sectors, demand for office space in the prime micro-markets of Mumbai came from the consulting, aviation, IT/ITES and other industries. The IT sector's recovery from the financial meltdown has shifted activity towards the suburban precincts of the city where significant IT supply is in the pipeline.

Key transactions in Mumbai in 1Q11 include the following:

• Viacom leasing 125,000 sq ft (11,163 sqm) in Zion Business Park, SBD North;

• Milestone Group purchasing 66,000 sq ft (6,132 sqm) in Patel Corporate Park, SBD North;

• TPG Group leasing 12,000 sq ft (1,115 sqm) in Platina, SBD BKC;

• Black Gold Holdings purchasing 25,000 sq ft (2,323 sqm) in Lodha Supremus (Worli Naka), SBD Central;

• Geoffreys Fund leasing 11,000 sq ft (1,022 sqm) at Maker Maxity, SBD BKC; and Supply

Five buildings in Mumbai's prime micro-markets completed in 1Q11, adding 795,562 sq ft (73,910 sqm) of office space and bringing total operational stock in Mumbai's prime micro-markets to 29.4 million sq ft (2.81 million sqm), with an overall vacancy level of 13.2%.

The major completions in Mumbai in 1Q11 included Urmi Estate (lower floors), which has a built-up area of 300,000 sq ft (27,871 sqm), located in Lower Parel; Supreme Chambers, which has a built-up area of 250,000 sq ft (23,226 sqm), located in Andheri (W); and Pranik Chambers, which has a built-up area of 120,000 sq ft (11,148 sqm), located in Andheri (E).

Asset Performance

As seen in 2H10, rental values in the premium micro-markets of the CBD and SBD BKC showed a marginal increase in 1Q11 due to the latent demand for office space in this micro-market. However, recent completions recorded in Mumbai's SBD have only moderate pre-commitments, keeping rents range bound in select secondary districts of Mumbai.

12-Month Outlook

With rental values showing signs of improvement over the past three quarters, rents are expected to continue to rise in the near term. Improving confidence among office occupiers and investors on the back of India's economic resurgence is expected to drive transaction volumes in 2011. However, with diverse supply conditions prevailing across different sub-markets in Mumbai, the rises in rentals and capital values are expected to vary according to location.

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Mumbai Prime Retail Market

Demand

Mumbai's retail market continued to grow in terms of leasing and pre-leasing activities in 1Q11. Overall improvements in retail sentiment and better employment scenarios have caused demand for retail space in the city to rise steadily over the past few quarters. Total net absorption of 387,427 sq ft (35,993 sqm) was recorded in 1Q11 compared to 375,461 sq ft (34,882 sqm) in the previous quarter. Similar to 4Q10, the majority of the net absorption in 1Q11 came from the suburban micro-market. Most of the malls that completed in 2009 and 2010, and had higher vacancy rates witnessed leasing in 1Q11, contributing significantly to the net absorption in the quarter.

Major leasing transactions during 1Q11 included the following:

• Reliance Hyper Market leasing 78,000 sq ft (7,246 sqm) in Market City Mall, Kurla, Suburbs;

• KidZania leasing 75,000 sq ft (6,968 sqm) in R-City Mall Phase-II, Ghatkopar, Suburbs; and

• Marks & Spencer leasing 22,000 sq ft (2,044 sqm) in Viva City Mall, Thane, Suburbs; Supply

In 1Q11, the Dattani Square mall commenced operations in the Suburban micro-market of Mumbai City, adding 700,000 sq ft (65,032 sqm) and bringing the total operational mall space of the city to 14.33 million sq ft. With moderate net absorption and no new completions, the Prime South and Prime North micro-markets witnessed a marginal reduction in vacancy rates in 1Q11. Vacancy rates in the Prime South and Prime North micro-markets fell to 6.5% and 17.0%, respectively, in 1Q11, down from 6.6% and 17.3%, respectively, in the previous quarter. Due to the additional 700,000 sq ft of mall space, the vacancy rate in the Suburbs micro-market was 28.0% in 1Q11, up from 26.8% in 4Q10.

Asset Performance

Rental values across the micro-markets of Mumbai remained stable in 1Q11. However, capital values in the Prime South micro-market grew marginally during the quarter in line with rising interest in prime retail properties in the city. The Prime South and Prime North micro-markets recorded an average rent of INR 225 and INR 135 per sq ft per month, respectively; the Suburbs micro-market saw an average rent of INR 85 per sq ft per month in 1Q11.

12-Month Outlook

Mumbai is expected to witness about 4.8 million sq ft (448,258 sqm) of new operational mall space by end-2011 and 6.9 million sq ft (643, 354 sqm) by 2013. Major completions are expected to be Infiniti Mall at Malad, Suburbs; Viva City Mall at Thane, Suburbs; R-City Mall Phase II at Ghatkopar, Suburbs; and Magnet Mall at Bhandup, Suburbs.

With the limited future supply in the Prime micro-markets, rents are expected to rise in the near term. The Suburban micro-market is also expected to see an appreciation in rental values over the coming quarters limited to certain quality assets.

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