Given the positive outlook on account of an improving economy, Colliers International in its quarterly review is of the opinion that office demand will remain firm, and in Mumbai the leasing activity will revive in Q2 2017
Gross office take-up in India amounted to 9.3 million sft (863,998 sqm) in Q1 2017. The market also recorded about 2.5 million sft (232,258 sq m) of pre-commitments signifying healthy demand. Although Q1 leasing volume represents a 25% decline q-o-q, volume is up by 8% y-o-y. The technology sector continued to generate demand for office space across cities, representing 51% of the total take-up in Q1 2017, followed by engineering and manufacturing on 11%, and banking, financial services and insurance on 9%. The Bengaluru market maintained its top position across nine cities despite low vacancy and recorded an overwhelming share of 37% of total absorption.
Mumbai and Delhi NCR followed with shares of 18% and 17% respectively in total absorption. Chennai, Pune, Hyderabad and Kolkata accounted for 11%, 9%, 6% and 2%, respectively, in the overall leasing volume.
It is expected that demand will remain firm in 2017, driven by technology and banking, financial services and insurance companies (BFSI). Supply of Grade A central office space will be replenished throughout the next 12 months but is unlikely to meet the demand in cities such as Bengaluru, Hyderabad, Chennai and Pune. Thus, upward pressure on prime rents will continue and there will be a 5% increase in coming quarters across these cities. The rental outlook will remain broadly stable in Delhi NCR, Mumbai and Kolkata; however, prime buildings will continue to command a premium over average market rents due to tenants’ appetite for Grade A developments.
Traditionally dominated by the banking and financial services sector, the Mumbai commercial market experienced diverse new leasing activity in Q1 2017 with demand driven primarily by companies in the logistics, media, advertising, fast-moving consumer goods (FMCG) sectors and law firms. With several big transactions currently in play, there will be a significant increase in leasing by these companies in the upcoming quarters. Grade A supply will remain a concern in the city and occupiers should consider optimising their workplace efficiency.
Relocation transactions outnumbered expansions and new entrants, thereby dominating the office leasing market in Mumbai. With absorption of 1.7 million sft (157,935 sq m), the leasing market remained subdued in Q1 2017 recording a 10% decline q-o-q.
Although leasing remained subdued, increased interest from investors is evident in the commercial property market. There were a few outright purchases in Q1 2017. According to market sources, pharma major Zydus Healthcare has bought 80,000 sft (7,432 sq m) of office space in Goregaon East at `1.72 billion; ICICI Prudential Life Insurance Co Ltd has also recently bought one floor covering 35,000 sft (3,252 sq m) in the Crescenzo building at Bandra Kurla Complex (BKC). Netmagic, a major player in the data centre market, has supposedly entered into an agreement with Hiranandani and Balaji Groups to purchase a commercial building in Chandivali (Powai) for `3.21 billion. Investor interest will remain elevated for Grade A non-strata sale buildings in the city.
While banking and financial services usually account for a big share in Mumbai leasing, a major shift in leasing concentration was observed in Q1 2017. Companies in logistics, media, advertising, FMCG and law firms accounted for a 35% share in total leasing volume, while other demand drivers like engineering & manufacturing, technology firms, banking and financial services (BFSI) along with healthcare & pharmaceuticals recorded a 20%, 19%, 18% and 5% share, respectively, of the overall leasing volume; consulting formed only a 3% share. It is expected that several large deals will conclude in the upcoming quarters by global consulting giants, which should revive the absorption numbers.
The western suburbs recorded a 37% share in leasing volume with occupiers’ preference concentrated in Andheri and Goregaon. Owing to the available Grade A stock, central suburbs and Navi Mumbai recorded a 27% and 15% share of leasing; while other micro-markets like Central Mumbai, Thane, BKC and CBD accounted for 21% share in absorption. Demand will follow supply; hence occupiers’ preference will remain concentrated in the western suburbs, central suburbs and Navi Mumbai. With premium completions in Q1 2017 such as Empressa, ATL Corporate Park and Crescent Business Square totaling to 0.4 million sft of new office stock (37,161 sqm), Andheri micro-market in the western suburbs should continue to outperform.
While the supply pipeline dried up in Thane, Powai and CBD with vacancy levels averaging 4-5%; markets such as Andheri and Navi Mumbai experienced a vacancy rate of 20%. With major developments such as Kanakia Wall Street, Times Square Tower D, Skyline Icon Corporate Park and Platinum, Andheri should witness supply addition of about three million sft (278,709 sqm) in the next two years. Navi Mumbai should also be a frontrunner in quality Grade A supply infusion with almost six million sft (557,418 sqm) of new supply by 2020. The upcoming supply pipeline in both these micro-markets should put further upward pressure on vacancy levels in coming quarters. On the other hand markets like Thane, Powai, CBD and LBS should be challenged by significant supply constraints as no major development is scheduled for completion in these micro-markets.
Rental values were unchanged since Q4 2016 owing to a steady supply and demand in most micro-markets. The stable rent scenario is likely to continue in the future as well since occupiers are looking to optimise costs and expand to locations with available quality stock. As there is a dearth of Grade A contiguous large floor plates across Mumbai, select buildings should continue to demand a premium over market average rent depending on demand supply dynamics at the micro-market level.
A significant increase in transaction volumes is expected in the coming quarters owing to a number of market transactions currently in play. Demand is likely to be led by logistics and pharmaceutical companies, consulting firms and serviced offices. Back office operations of a few banking and financial companies moved to Navi Mumbai in Q4 2016 and Q1 2017. This number is bound to increase in coming quarters as occupiers may continue to relocate at affordable locations in Navi Mumbai. Rental and capital values are set to remain stable as the tenant demand of smaller plate sizes should be met by most micro-markets for the next few months.
Recently, City and Industrial Development Corporation (CIDCO) awarded the first phase of the Navi Mumbai airport to GVK Group. In addition, work on Metro II A and B and Metro III is in full swing. These projects should improve connectivity in Mumbai significantly, thereby affecting the office market positively. The revised Mumbai Development Plan (DP), although delayed due to several corrections and alterations, is likely to be finalised soon. Builders keenly await the same to get clarity on the Development Control Rules (DCR) to be followed for ongoing and planned projects.