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Mumbai: The niche real estate market

| 1/13/2012 11:19 AM Friday

Over the last few years, some of the best returns have been from investment in Mumbai properties, thanks to extreme scarcity of development land and high rental yields. Certainly investment in properties has been one of the key investment markets for investors in Mumbai over the last few years. Real Estate rental values are at high levels and are increasing year-on-year. The inadequate availability of good quality properties in Mumbai’s sought after locations is becoming crucial with every passing day.

The property market in Mumbai is being driven by a lack of choice of good quality space due to the shortage of development land. While realty prices in the rest of the country are declining, prime areas of Mumbai are optimistic with more houses appearing in estate agents’ windows with high price tags attached. Mumbai real estate has become an international commodity, with investors and NRI buyers driving prices up above peak levels. Despite Mumbai the financial capital of India being ranked third cheapest place to live by Worldwide Cost of Living Survey conducted by international research firm Economist Intelligence Unit, many Mumbaikars find it hard to buy a decent living accommodation in their preferred locations.

The Indian city ranking among five cheapest has come as a shocker, as soaring realty prices have been a matter of severe concern for the common man. Not only ownership prices; Mumbai tops India’s rental price market as well. Investors, who account for more than 50 per cent of transactions in Mumbai, have turned Mumbai into a market driven by exchange rates rather than home loan interest rates. Wealthy NRIs and investors see Mumbai property as a safe haven for their money. There’s a new report every other day predicting variances of whether house prices are creeping up again or are set to fall further – it’s hard to know what to believe.

But as things stand today, Mumbai real estate is among the most expensive in the world – more than that of Tokyo or New York – and there is no shortage of those who can afford to pay. The city also attracts millions of low wage workers every year, and there are ever-expanding slums that house more than half of the city’s population. In addition to sea view penthouses on Marine Drive, Worli, Juhu etc, there are luxurious duplexes across the city, with many new residential projects to fully furnished offices and ‘built-to-suit’ commercial spaces including upscale multi-family apartment communities. Some analysts say that Mumbai real estate has started seeing a slide in property prices; others may witness the decline gradually.

The city of dreams, as it is fondly called, is going to retain the costliest city status for years. The city area is likely to witness as appreciation of 5-8 per cent while the suburbs can expect a rise of 7-11 per cent. Together with growing internal population, demand will rise to match supply. While recently the Supreme Court has allowed buyers of mill lands to get their development plans approved, it has restrained them from constructing pending the litigation on mill land usage. One therefore doesn’t foresee any oversupply of inventory and in the next two years at least prices would remain firm. On the commercial property front, places like Nariman Point are making a comeback.

There is limited supply of premium category flats catering to the High Networth Individual. Prices in this segment could move up 20-25 per cent. Overall, increasing land prices seems to be the determining factor in the upward spiral of rates. There is neither slump nor an oversupply situation waiting to happen and so it is highly unlikely that the projected appreciation would not take place. Fortunately, speculative demand is not high enough to push prices further. If the mill land case goes against the developers who bought the land, prices could shoot up by another seven per cent or so.

Another driver of prices is the switch over of the middle-class from the leasing option to the purchase option. More and more buyers are coming forward with open minds and purchasing whatever suits them or fits them best. Since the RBI has signalled that it would revise its rate policy soon, people look optimistic to make purchases going forward.

Residential Real Estate
With the market set to bottom by the second quarter of 2012, we will see the beginning of a recovery in the city’s residential real estate fortunes by the second half of the year. Meanwhile, there is very little scope for appreciation in under-construction projects. In fact, unsold under-construction stock will increase significantly. There is a lot of scope for strategic pre-launch bulk investment deals by HNIs who can predict where the market will head later in the year. Currently, buyers are not expressing any interest in projects that are perceived to be overpriced, and this trend will continue throughout the first half of 2012. In this period, the city’s residential market will be more or less sustained by the sale of affordably priced mid-income apartments. This absorption will be driven by both end users and HNI investors. However, completed high-end projects will become costlier by mid-year, largely because of reduced supply in this segment. The new DCR regulations would further impact new launches in the first half.

The reduction of interest rates expected by the second half of the year will help kick-start a generalized – though cautious - recovery in demand for residential property, leading to an increase in launches. Many HNI investors would have perceived this trend and already parked their monies in advantageously located residential projects by well-funded developers. Their investments will be amply vindicated at this point.

Commercial Real Estate
For those who thought 2011 was a discouraging year for Mumbai’s office space market, 2012 will not bring any obvious reasons for cheer. Demand will be marginally lower than in 2011, with IT and ITES companies becoming even more cautious on account of the expected reduction in IT spend by US and European companies. The uncertain economic environment will continue, leading to reduced employment growth and therefore lower fresh commercial space absorption. Tighter lending standards for commercial construction will not help, either.

On the brighter side, these market conditions will continue to favour tenants in most of Mumbai’s micro-markets by ways of a larger bouquet of options, rational pricing and various concessions. The market conditions are optimal for consolidation and relocation, and many Mumbai-based occupiers will avail of this option throughout 2012.

Office space rentals will show a further - though marginal - drop in the first half of the year as infusions of additional stock lead to higher vacancies. One direct result of this will be a sharp reduction in speculative commercial projects. The continued yield compression will cause a number of HNIs to become active buyers of rent-producing and vacant office spaces in the city.

Also, demand for smaller offices in Grade A projects is expected to increase as more small and medium sized Indian corporates take advantage of the rationalized pricing and buy space in them.

Another interesting trend is the remodelling of commercial spaces to retail spaces. The property values for commercial spaces are touching the skies and developers are finding it difficult to sell their commercial/office property. Hence, many of them are positioning their property as retail space in a hope to find more takers. Investors are targeting Navi Mumbai because the prices here are on the increase. It is a newly developed area just across the harbour.

Retail Real Estate
Mumbai’s retail real estate sector looks buoyant in 2012. We will see some of the city’s older malls being repositioned, refurbished and re-tenanted. Vacancy levels will increase in several poorly-designed and unfavourably located malls. Interestingly, the redevelopment of several old residential societies in the Island city will give rise to an unexpected availability of more high street retail space. More store-within-store formats, drive-through lanes and pick-up zones will be implemented in 2012.

Mumbai’s retail space landlords are taking a progressive view of the sector’s future. They have already begun to express greater willingness to opt for a revenue-sharing arrangement, rather than insisting on pure rental-based deals. Despite the political reverberations, we expect FDI in multi-brand retail to be officially allowed in the second half.
 
Real Estate Investment
In 2012, Mumbai will underscore its status as a relatively safe haven for Indian core real estate. HNI investors will re-enter the market in a big way, and the increased HNI investment volumes are likely to put pressure on core cap rate. The market could see short-run fluctuations as investors alternate between seeking out more risk and briefly pulling back. Overall, it is the financial market volatility which will continue to drive sentiment swings.

Debt capital availability is likely to increase for core investments in the financial capital; however, financing challenges will continue for high-risk, opportunistic real estate investments. With stiffening of lending policies and standards, debt will become more expensive and many city developers will reconsider the private equity route for their funding needs.

There is every indication that in 2012, a number of distressed projects by smaller developers will be acquired by large and medium-sized developers at sub-valuation prices. Some developers are gearing up to sell their non-core land and divest their stakes in non-core businesses such as hospitality and retail.

New FSI Rules
The Maharashtra government has amended the DCR to include areas like flowerbed, balcony, voids and niches in the FSI calculation. However, official notification is yet to be received on the same. The move is aimed at plugging the earlier loopholes, wherein builders built large flower beds and deck-parking areas to enlarge the project’s saleable area. In the amended rules, an ‘Allin’ FSI calculation will be applied and the builder will be required to pay a premium amounting to 60 per cent of the ready reckoner rate on the additional 35 per cent fungible FSI to be allowed. For industrial and commercial properties, 80 and 100 per cent premium will be required to be paid.   

This amendment will not result in any extra area for the builder, as a typical project would have included 30-35 per cent areas like flowerbeds, balconies voids etc. (Free of FSI area) which is over and above the normal FSI. However, the builders shall get the flexibility to use this extra FSI for any purpose and thereby, could increase the carpet area.  

However, costs are expected to increase as builders will be required to pay a premium amounting to 60 per cent of the ready reckoner rate for availing the extra fungible FSI. As per the initial calculations, without accounting for any changes in pricing strategies, margins could get hit by nine per cent on a standard project. However, it is believed that since this FSI can be used to increase carpet area, new pricing strategies based on carpet area shall emerge.

This system might help a level playing field to developers. In the earlier system, only a few developers could exploit the loopholes in the system to make abnormal profits. Under the new rules, discretionary powers of the BMC Commissioner have been substantially reduced, paving the way to create a more level-playing field in the sector. With the passage of this new policy, a significant positive development would be the resumption in granting of approvals, with emergence of clarity on the policy front. Also, the new rules could provide an impetus to land deals, which were earlier stuck owing to lack of policy clarity on FSI norms.

CBDs in Mumbai
  • The Southern Part of Mumbai which is Nariman Point, Fort, Ballard Estate, Opera House the prime CBD and the Financial hub with the Banks, Stock Market, Shipping and the Bullion Traders
  • The Worli-Lower Parel belt has the Ad agencies, Corporates and Pharma Cos.
  • Bandra Kurla Complex is dotted with independent and wholly-owned buildings by Banks, National Stock Exchange large MNC’s have their offices here, the Maker City holds offices of Volkswagen, Nomura and numerous other large companies.
  • Santacruz East-Kalina – Another large commercial office location with the Grand Hyatt right next to it, buildings like Windsor, Raheja Plaza, Trade Centre, Synergy are the best here.
  • Andheri-Kurla belt – One of the most populated belt offering office spaces from 300 sq.ft to an independent building of 300,000 offers something for everyone at affordable prices and good connectivity to most of the Western, Central, Eastern and Navi Mumbai
  • Goregaon-Malad – Hub of the IT industry in Mumbai with Call centres and back office ops going down well in sprawling IT Complexes. The finest building in this location is the Oberoi Commerz.
  • Mulund-Powai-Vikhroli Belt – Most surprisingly upcoming belt offering quality spaces in the offices arena in reasonable prices.
  • Thane – The emerging IT and ITes destination, however, it is yet to come up and by the year 2010-11, Thane should have more than 30 million Sq.ft of office spaces.
  • Navi Mumbai – Stretching from Airoli to Belapur CBD, Navi Mumbai has a mix of activity in each sector, large companies like Reliance have their head offices planned there.

 

Find More Articles on: DSIJ Magazine, Real Estate Strategy

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