A Review Of 2012Mumbai saw office absorption of 6.6 million square feet – down from 9.6 million square feet in 2011, reflecting a combination of lukewarm economic growth, lower employment generation and an overall decline in corporate buoyancy. Transactional activity from the BFSI sector was down, with many banks focusing on workplace strategies to drive a more intense use of existing space.
Sectors like Pharma and Media continued to thrive, resulting in a few big ticket transactions and helping to boost activity. The last three years saw significant levels of new office supply, providing a greater selection for tenants and resulting in a narrowing of the rent gap between the CBD markets and the suburbs.
Expansion demand was subdued in 2012 on the back of corporate caution and slower economic growth, but relocations and consolidations led to buoyancy in leasing activity. With economic uncertainty continuing to weigh down on current and future corporate demand levels, the global debt crisis combined with evidence of weakening economic growth caused corporates to postpone real estate decisions and delay implementation of longer-term strategies. This impacted transaction volumes in 2012.
Capital Values grew at a much faster pace than rents in 2012 – a trend that is likely to prevail in 2013 as well. Capital values in different sub-markets appreciated at around 5%, except in the CBD, SBD North and Eastern suburbs, where they remained largely flat during 2012.
The manufacturing and industrial sectors, followed by IT/ITeS sector, led transaction activity during 2012 with more than 50% representation. BFSI contributed to nearly 20% of the leasing activity, followed by other sectors such as service providers and consulting firms.
Rents in most of Mumbai’s micro-markets stabilised in 2012, although vacancies remain high. Most of the micro-markets are now showing convincing indications of having bottomed out. Good quality, modern spaces in good locations are being absorbed. One element hindering a faster decline in vacancy is the release of second-hand space. Prime yields reduced in all micro markets on the back of robust investor demand for high-quality, leased-out core assets.
Given the typical time-lag between an upturn in economic fortunes and leasing market activity, a full-fledged recovery in leasing volumes in early 2013 seems unlikely. Heading into 2013, doubts over future economic conditions may continue to dampen corporate demand.
By the middle of 2013, some clarity around the Europe debacle and the near-term fiscal situation in the US could lead to vibrancy in the market. Development activity has reduced drastically given the lack of liquidity and reduction in pre lets. While the overall office market continues to be tenant-favourable, demand is still concentrated on just a few buildings in each micro market. The range of single-ownership prime buildings is more restricted than the overall vacancy figures would suggest.
Recovery is expected pick up pace in 2013. The decline in vacancy rates, as well as robust absorption supported by the sluggish development response will cause rentals to increase in various micro markets in 3Q and 4Q 2013.
· Occupier Scenario
In the medium term, large tenants in prime markets will face a supply-constrained marketplace with few big blocks of available contiguous quality space. However, office markets across Mumbai will continue to be tenant-favourable at least for the first two quarters, with occupiers benefiting from an increased choice of new high-quality premises and reduced occupancy costs. As tenants have increasingly sought to ‘right size’ their footprint, focus on enhanced space efficiencies and eliminate redundancies, they are concentrating on not just ‘quality’ but also on efficiency.
Corporates are currently in a holding pattern, awaiting stronger signals of sustainable demand growth. There has been a strong uptick in the preference for shorter lease terms. Although transactional activity has not grown, corporate real estate teams within major corporations continue to develop transformative occupational and portfolio strategies, supported by enhanced real estate data and metrics. At the heart of these strategies are workplace strategies that contribute to cost reduction, bolster worker productivity and support talent acquisition and retention. These strategies will play out in the market over the medium term.
· Vacancy Scenario
Vacancy, which is currently at 22%, will begin edging downwards from 4Q 2013. This vacancy reduction, when it takes place, will be the first decrease since 2006.
· Demand Scenario
The absorption forecast for 2013 will be 10–12% above that of 2012 as corporate occupiers focus on consolidation to take advantage of the market bottoming out. Leasing activity is expected to go up in the last two quarters of 2013. Growth will remain slow until the economic recovery filters through and generates more pronounced job growth and expansionary demand. Most demand is coming from consolidation and relocation rather than expansion.
· Supply Scenario
The development pipeline is reducing, with new completions of Grade A office buildings likely to be restrained in 2013 and ’14. New office launches and deliveries (except projects which did not get completed in 2012) will be at a low level, and construction is not likely to pick up until 2015. Any significant improvement in occupier demand will do nothing but add to the pressure on supply, thereby stimulating increase of rents and capital values in Grade A buildings within the prime locations.
The completion rate for Grade A office projects over the next two years will be much lower than in the preceding three years. Many speculative completions will not see the light of day till 2015-2016. A substantial amount of new supply will become available in select markets only in 2015.
The trend of completion of high quality new projects pushing up Grade A vacancy levels and providing tenants with greater bargaining power will reduce. With banks having slowed down lending activities over the last two years, debt remains a constraint and not many new launches are expected in 2013 and 2014. In some markets, projects at a launch stage have been converted for residential or hotel uses.
· Capital And Rental Values Scenario
Rents in different sub-markets of Mumbai are expected to record reasonable appreciation during 2013, and at a faster pace than in 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 by around 6% in 2013.
The average capital value appreciation is expected to be around 7% y-o-y during 2013, with most major markets in Mumbai seeing increases (largely in tandem with rentals). This offers some cause for optimism but economic headwinds do persist, notably in terms of economic growth.
SBD Central and SBD BKC are expected to record marginal rental increases at a sub-market level during 2013. Due to infusion of investor supply into the lease market in select sub-markets such as SBD Central, SBD North and Navi Mumbai, there could be marginal softening of rentals at a project level in non-prime projects in 2013.
· Investment Scenario
Investment volumes are expected to go up in 2013. Both the Eastern and Western suburbs of Greater Mumbai as well as Thane and Navi Mumbai are likely to witness rental appreciation in the range of 6% y-o-y during 2013. The drivers behind this will be 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, the investment market will do better in 2013, with a substantial weight of capital targeting office real estate (especially Grade A and trophy assets) thereby increasing investment volumes. 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 remains healthy for core assets but inches back for non-core assets.
To Summarize
In 2013, shortage of quality space will intensify. It will once again become clear that commercial property in Mumbai is seen as attractive and somewhat ‘safer’ option as against other asset classes and geographies around India. When the recovery does finally pick up in earnest, landlords are likely to be more aggressive.
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 there. The trend of corporates beginning to buy as against leasing is expected to increase. We expect the IT and manufacturing sectors to contribute equally to the leasing activity in the coming year, with a cautious and selective expansion of BFSI majors during 2013.
By: Ramesh Nair, Managing Director – Mumbai, Jones Lang LaSalle India