Where to invest in commercial real estate in Mumbai

Ramesh Nair, Managing Director – West, Jones Lang LaSalle India

Over the last few years, the number of HNI investors and corporates who are seriously looking at investing into Indian office space has increased manifold. Mumbai continues to hold its own as India’s numero uno office space investment destination, with companies from all over the world unerringly zeroing in on the financial capital. As South Asia’s only true financial hub, Mumbai is among India’s best places to invest in commercial real estate. In times of global economic uncertainty, investors flock to markets that have consistently proved their long-term stability and fundamentals.

In a scenario wherein institutional investors are showing reduced preference for commercial real estate in their portfolios, Mumbai continues to present HNI and corporate investors with myriad growth opportunities in office properties. However, the multitude of options also gives many enthusiastic investors heartburn – where on Mumbai’s vast and complex map are the low-risk / high returns locations? Obviously, the lodestone for successful office space investment in Mumbai is market knowledge.

Today, Mumbai as a city for commercial space investment reveals a high rate of vacancies in many locations. The rental yields in these micro-locations are expected to decrease marginally over the next 12 months. While this seems to present a depressing scenario on the surface, the fact is that we are now looking at the bottom of the curve. In other words, these markets are expected to bottom out over the next one year and will consequently start to move up again. These locations have significant long-term capital value appreciation potential, and well-informed investors are keeping a close eye on them.

Mumbai Commercial Property Classified:

• The Central Business District (CBD) which includes the micro-markets of Nariman Point, Fort, Ballard Estate, Cuffe Parade and Churchgate
• The Secondary Business District (SBD) which includes the micro-markets of Worli, Lower Parel, Prabhadevi, Bandra Kurla Complex (BKC) and Kalina, and
• The Peripheral Business Districts of Andheri–Jogeshwari, Malad–Goregaon, Powai–LBS Marg and Thane-Navi Mumbai.

The commercial property investment opportunities vary according to the unique characteristics of each micro-market. At first glance, some of these markets would seem to be places to avoid, given the high vacancies there. However, some of these areas bear closer scrutiny beyond the seemingly obvious.

Data of past trends shows that rentals and capital values in almost all Mumbai micro-markets except Lower Parel and Andheri have either remained stable or gone up over the last 30 months. Many corporates are today migrating from the traditional CBD to BKC and Lower Parel. The motivation behind this migration is the age of the buildings, high rentals, lack of amenities and car parking, safety, maintenance and smaller floor plates in the CBD area.

Over the next two years, the rentals and capital values in Mumbai’s CBD are expected to come down, rendering them more buyer and tenant-oriented for the first time in decades. Meanwhile, the SBD district of Lower Parel is seeing significant demand, given the fact that the rentals and capital values there are less than half of those in the CBD and at Bandra Kurla Complex. Over the next 12 months, the rental and capital values in Lower Parel are expected to bottom out. Commercial properties here are an excellent investment proposition at the current pricing levels.

Meanwhile, BKC is emerging as Mumbai’s acknowledged ‘alternate CBD’, with many banks moving their headquarters there from their erstwhile CBD locations. Capital values and rental values in BKC are expected to go up in the medium term, making commercial properties there a good buy. The limited commercial space supply that BKC will have to address the strong demand over the next two years adds to its investment potential. Bandra Kurla Complex is particularly interesting to HNIs from the diamond industry, given its proximity to the diamond bourse.

• In Andheri, rentals and capital values are not going to improve significantly over the next 18 months, given the high vacancy levels currently prevailing there.
• The Western suburbs of Jogeshwari, Malad, Goregaon and Borivali are seeing healthy and growing demand due to the proximity to employee catchment zones. However, they will not see much rental and capital appreciation either because of the high quantum of existing supply.
• No major changes are expected in rentals and capital values in Eastern suburbs, where demand is keeping pace with supply
• Thane and Navi Mumbai will also remain stable, given the existing supply.

Office Space Investment Guidelines:

• Entrepreneurs who are considering buying commercial real estate for self-use should ensure that the amenities in the project match their business needs
• Investors need to make sure that they study the quality of building, location, demand supply dynamics and yield compression possibility
• The best buildings in each micro-market will always command a premium
• Check the developer credentials, potential for infrastructure development, access to public transport and quality of property management

·         Investors looking at income-producing office assets should look at the break-up of cash flows, the vacancy factor, expenses such as maintenance, property tax and building insurance, lease term, lock-in period and expiry dates,  long term capital appreciation potential and refurbishment, refinancing and re-positioning potential.