MUMBAI: In 2014, the shortage of high-quality office spaces in Mumbai will intensify. However, overall office stock in the city is expected to rise by 7.4% y/y in 2014. The sub-markets which will see highest rise in stock of office space include the West Suburbs, SBD North and East Suburbs (in that order). The CBD, SBD-Central and Thane-Navi Mumbai will witness the least or very moderate growth in stock.
In 2013, absorption of office space rose and the capital values and rental values had risen marginally, with the former rising slightly faster than the latter. This rightly reflects the dichotomy that Indian economy faces currently – that of low demand (absorption) against a rising inflation.
With business sentiments unlikely to change drastically in the near-term, we expect absorption to remain slow, yet growing. Therefore, rental and capital values will continue to grow moderately. Capital values (4.5% y/y) will continue to rise faster than rental values (3.4% y/y) during the year. Slowing growth of stock as against moderate absorption level will lead to vacancy falling by 0.5%-1.0% in 2014.
The surplus stock and vacant spots will be beneficial for the sector in 2014. As of end-2013, the Eastern Suburbs sub-market (which includes Powai, Vikroli and Kanjur Marg) occupies office stock which equals or exceeds that of more established sub-markets such as SBD-BKC and SBD-Central. The markets with the largest stock are Thane/Navi Mumbai and SBD North, with 20 million and 18 million square feet respectively. Office space vacancy in Mumbai dropped to 22.9% in 2013, contributed by a drop in vacancy in SBD-Central, Western Suburbs and Thane-Navi Mumbai. Vacancy also rose in the Eastern Suburbs and CBD during the year. Inspite of the drop, vacancy still remains high in Thane/Navi Mumbai and SBD North.
Investment volumes are expected to go up in 2014, driven by 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 2014, with a substantial weight of capital targeting office real estate (especially Grade A and trophy assets). Strong investor demand for prime office assets and the lack of new supply of core investment options in the primary markets will result in further yield compression. Debt capital availability remains healthy for core assets, but inches back for non-core assets.
Events that could be real game-changers for Mumbai’s commercial real estate market are the general elections scheduled in the 2Q-2014, and RBI’s announcement of new banking licenses (due early 2014). Both these events could radically impact business sentiment across the nation. Mumbai, being home to the largest agglomeration of BFSI companies, would witness positive momentum as more banks are allowed to operate in India.