Office rents in Mumbai on the rise despite weak demand

The laws of economics do not seem to work on Mumbai's property market.

At a time when demand is weak commercial office space rates in the business districts of Mumbai continue to remain stubbornly high.

The office vacancy level in Mumbai is estimated at 19% with many commercial buildings lying vacant across the city, data available with real estate consultancy firms showed. But even then rentals have increased by 1.3-1.5% in the past one year.

"In the recent past, many corporate decision makers have been wondering aloud why the rents and capital values in markets such as Lower Parel and Bandra-Kurla Complex (BKC) have risen. The answer to this query is lack of quality supply in superior locations," Ramesh Nair, managing director for the western region at Jones Lang La Salle India, said.

In BKC, one of the main business hubs in the city, the average rental in April-June, 2012 was estimated at Rs 224 per square feet per month, up 1.5% from a year ago. In the western and eastern sub-urban areas the increase has been around 1.3%.

"Corporate tenants who need to relocate, contract, expand or consolidate are still actively scouting for properties in the central business district areas. They are, in fact, competing with other prospective tenants and buyers for the restricted range of available properties," Nair said.

He added that the preference for lower-priced properties in place of prime commercial space is fairly low.

According to industry players, the increase in construction costs over the last two years will prevent any decline in commercial capital values in places like Thane and Navi Mumbai despite over 25% vacancy.

With banks and private equity investors wary of financing speculative commercial construction, they expect new office space launches to remain slow. Majority of the projects that are nearing completion were conceptualised in 2007 or 2008.

"Rents and capital values in the Grade A commercial buildings of micro-markets such as BKC and Lower Parel are expected to increase by 8-20% over the next 12-18 months," Nair said.