Mumbai, India’s commercial capital, saw yet another year of tepid real estate leasing activity in 2014 as the overall leasing activity dropped to its lowest in five years, despite a demand revival in the last three months of the calendar year, according to a report by commercial real estate consulting firm Colliers International.
Absorption of commercial real estate in Mumbai fell to 3.12 million sq ft in 2014, down 44% from 2013.
The trends in leasing of commercial real estate in Mumbai was in contrast with those visible in the rest of the country. Office space leasing across India saw a year-on-year rise of 11% at 35 million sq ft, the Colliers report said. Leasing activity was dominated by Bengaluru with a 39% of the overall market, followed by Delhi and the National Capital Region (22%) and Pune (14%).
“The improved economic sentiment in India has led companies revisit their office space requirement and future expansion plans. Some of this was reflected in the total space absorbed in 2014. We anticipate more robust expansion plans in 2015,” says Surabhi Arora, associate director (research) at Colliers International.
Limited traction in the information technology (IT) space was the main reason for leasing of commercial spaces declining in the city. IT companies are driving office space leasing in the rest of the country with large IT companies as well as start-up ventures expanding operations.
According to the Colliers report, not only the volume of transactions, but even the average size of real estate leased out remained small in Mumbai. Around 60% of the commercial real estate transactions that took place in Mumbai in 2014 were for office space measuring 5,000 sq ft to 20,000 sq ft.
The rent commanded by commercial real estate in Mumbai also remained under pressure and declined in the range of 4-8% year-on-year in 2014. In Thane, the average rent was around R50 per sq ft per month, while in Bandra Kurla Complex (BKC), it stood at around R250 per sq ft per month, while in Andheri, rent was in the range of R110-115 per sq ft per month.
Arora of Colliers International says that the primary reason for this decline is limited participation of cost-conscious IT firms. “Many corporations put their investment decisions on hold, waiting to see how the city’s economic scenario shapes up, especially in light of the new policies expected to be set by the new state government,” she said.
In a report issued earlier this month, Kotak Institutional Equities had said that while sales and leasing activity are expected to improve over the next few quarters in Mumbai, no major uptick in prices is expected, especially in the BKC market.
The Colliers report forecasts demand for office space picking up in 2015 in Mumbai with a projected demand of 6.36 million sq ft, around double of the actual absorption of office space last year. But rent is expected to remain under pressure.
Rohit Kumar, head of research (India) at DTZ, said in a February 2015 report that Mumbai witnessed a decline in prime rental values due to lack of demand for micro-markets located in central business districts (CBD). “This low demand is expected to further reduce rents in Mumbai CBD by about 3% to 7% in 2015,” Kumar said. However, other cities are likely to witness up to 7% rise in prime rental values in 2015, he added.