Commercial rentals in Mumbai are beginning to crack and deals for office space have slowed over 30 per cent in the last three months. Leading property brokers and consultants in Mumbai say things will be worse with prospective tenants asking for a 50 per cent cut in rates.
This depression in the commercial market is a potent sign of the fall-out from the financial crisis in the US. Companies, mainly IT and BPO service providers and finance firms, with significant US businesses are cutting back expansion plans and, therefore, the need for prime commercial real estate. Meanwhile, tighter liquidity at home is encouraging companies to defer their property bookings.
In the Bandra Kurla Complex, the city's second main commercial hub where rentals peaked at Rs 450 per sq ft a month, clients are now negotiating with developers at below Rs 300 per sq ft. Rents are expected to come down to Rs 200 a sq feet when three prominent buildings are completed in six months.
In the Churchgate area of business district Nariman Point, which houses old office buildings, rentals have already settled at Rs 240-250 sq ft a month from Rs 325-350 a sq ft barely two months ago. That is a 45 per cent correction.
“Companies are not signing at the rates asked by developers like they did earlier and transactions are not taking place. We have seen prices correcting sharply in Nariman Point in the last one month,'' said Suketu Mody, president and chief operating officer of Coldwell Banker Goodwill Consultants, a US-based consultancy firm that advises many Indian companies on their property deals.
Battery Ventures, a venture capital firm that has been looking for 3,000 sq ft of space in central Mumbai for the last couple of months, is still waiting in the hope of a further fall in rentals.
"We have seen a five per cent correction in rentals in the last three months and expect a 10 to 15 per cent further correction in the coming months. We will certainly wait some more time,” said Gautam Patel, partner, Battery Ventures.
The other factor they are banking on is the enormous supply lined up.
By early next year, Mumbai and its suburbs will add 15.4 million sq ft of office space, more than the commercial space now available at the Bandra-Kurla Complex or seven times the office space at Nariman Point.
Business consultancy KPMG's Jai Mavani believes that since companies have deferred their plans in the current conditions, most of them are going for smaller lock-ins with developers and saying they will book more space later when the market improves.
Rentals are expected to fall another 15 to 20 per cent in the next six to nine months as IT and BPO companies cut back on expansion plans as the financial crisis in the US, their biggest market, kicks in.
As a result, vacancy levels in commercial space across the country is expected to touch 7.5 to 8 per cent by the end of this year from 5.5 per cent to 6 per cent in June.
"Demand will slow from IT, BPO and finance companies that have enough choice in cities like Bangalore and Hyderabad. Rentals will drop to levels that you have seen two years ago,'' said Pranay Vakil, chairman of Knight Frank, an international property consultancy.
Added Mahua Ghose, managing director of IL&FS Property Management & Services: "So far rentals have corrected much more than selling prices. After Diwali, I believe selling prices will also correct significantly.''
However, developers believe demand will come from newer sectors of the economy and at different levels of the property market. "Though some companies have reduced space requirement, quality space is readily acceptable to high-end clients. Companies are moving to different parts of the city which is economical for them,'' said Hemant Shah, chairman of Akruti City, which builds offices and homes in Mumbai.
"I am not worried even if prices correct 10 to 15 per cent because it is good for both buyers and sellers,'' he added.
