Oversupply may bring down Mumbai office rentals

NEW DELHI: For the first time in the past five years, Mumbai���s commercial real estate market is headed for an oversupply with a total of 16.02 million sq ft of new commercial office space expected to enter the market in 2009. However, demand has been dipping steadily.

According to property consultancy Jones Lang LaSalle Meghraj (JLL-M), the demand for office space has dropped 60-80% compared to the peak period from late 2005 to early 2008.

Some parts of the city had seen rental appreciation of over 100% during the period on the back of demand from the banking, financial services and insurance (BFSI) and IT/ITES sectors.

���Rentals are set to go down a further 20-25% in Mumbai owing to the mismatch in supply and demand. BFSI, which generated the most demand for the Mumbai market, has been hit the most in the recent times,��� said Vivek Dahiya, CEO of property consultancy GenReal.

A JLL-M report ���The Slope of Descent��� says: ���The BFSI and IT/ITES sectors ��� the most prominent office space occupiers in the country ��� have been adversely affected in the economic downturn. The BFSI sector suffered globally with the collapse of major US and UK banks resulting in many financial corporates putting their expansion plans on hold. BFSI demand for office space in India���s business districts fell in 2008, and it is projected to remain sluggish in the short term.���

The mismatch for many years has been on the supply side that has been reversed now. Throughout 2006-08, Mumbai thrived on new companies coming in. A number of investment banks, management consultancies, private equity firms and others, who entered the Indian market, wanted to take up space in the financial capital of India, mostly south Mumbai. ���The only demand that is there in the market today is from the non-BSFI corporate segment,��� said Kaustuv Roy, executive director at Cushman & Wakefield.

The first quarter of 2009 saw a total supply of 2.47 million sq ft of new space in Mumbai, of which the total absorption of space is only 35%. The total absorption was only 896,454 sq ft. Rentals have been steadily falling in most major micro-markets of Mumbai.

Rentals in Nariman Point are down 13% compared to last quarter and about 30% down compared to a year-ago.
Worli, Lower Parel, Bandra Kurla Complex and Andheri-Kurla are the worst-hit, with rentals declining by 38%, 39%, 27% and 33%, respectively, over the last one year.

This is the best time for businesses to relocate to locations that offer lower rentals and bring down operating cost. ���There is some leasing activity going on, but only for the price conscious that is mainly for relocation. The business expansion demand has completely dried out in the city,��� said Aniruddh Wahal, national head, strategic occupier services at JLL-M.