Mumbai realtors may switch from residential to commercial projects

Mumbai property developers may convert their planned premium and luxury residential projects into commercial projects. This is because commercial projects have been given a higher floor space index (FSI) in the new development plan for the city, and residential markets are in the doldrums, according to consultants and developers. The FSI is permissible construction on any plot of land. The new development plan increased the FSI from 1.33 to three and five for residential and commercial properties, respectively, in the island city of Mumbai. 

In the suburbs, the FSI was increased from 2 to 2.5 for residential properties and from 2.5 to five for commercial properties.

“I expect the higher commercial FSI to encourage existing premium and luxury residential plans to convert into commercial, particularly, given the stagnancy in residential sales for premium and luxury segment developments and its ongoing correction, and compliance complications residential projects face under the real estate regulation law,” said Ravi Ahuja, senior executive director, Mumbai & Developer Services, Colliers International India.
 

Ahuja said he expected property developers to start conversion in identified locations. He said office leasing demand continued to be steady at 5-6 million square feet per annum in Mumbai.

The absorption of residential units has fallen 72 per cent in the first quarter of this year and new launches in Mumbai dropped 49 per cent on a yearly basis in the first quarter of the calendar year, according to PropEquity. ICICI Securities expects the Mumbai Metropolitan Region, which includes Thane and Navi Mumbai, to continue to absorb 3-4 million square feet of Grade A office properties annually, against 14 million square feet of under-construction projects in the city. Office properties of an additional 9-10 million square feet are scheduled for completion over 2018 and 2019, of which a majority will be in Navi Mumbai and Mumbai’s western suburbs, according to ICICI Securities.

Ahuja said one must consider the premiums for the increased FSI because these will lead to cost escalation.

“However, incremental supply due to the increased FSI is expected to keep office rentals and capital values of under check,” he said.

 

Amit Bhagat, managing director and chief executive officer at ASK Property Investment Advisors, a fund manager, said the demand for commercial properties would remain robust but the conversion of residential into commercial would be based on location, access and infrastructure.

“This conversion is more feasible in suburbs but not in the island city since the cost of operations is high and commuting for most of the workforce is inconvenient. Eventually completing infrastructure projects will be a deciding factor,” Bhagat said.

Ashish Shah, chief operating officer, Radius Developers, said while the increase in the FSI was welcome, the absorption of space on that scale would take time catching up.

“Office absorption is dependent on key macro indicators such as private sector Investment growth and expansion. Once that kicks in, the demand will be there. Conversion may occur in micro markets affected by sluggish residential demand, assuming public transportation is readily available for a thriving commercial hub.”

But developers such as Niranjan Hiranandani, managing director at Hiranandani Constructions, have a different take on the impact.

“It can happen in some pockets but you cannot generalise it for the whole of Mumbai. Even today, sale prices of residential properties in Nariman Point are higher than commercial prices,” Hiranandani said.