Mumbai only city among top 7 to see correction in office rental since 2012

At a time when real estate investment trusts (REITs) are witnessing a pick-up in investor interest, a historically higher base coupled with rise in low-value transactions have made Mumbai stand out as the only market among the top seven cities to have seen its office space rentals correct since 2012.

According to data by real estate consulting firm Knight Frank, against Rs 127 per square feet per month (pspm) in 2012, Mumbai’s office space rentals corrected to as low as Rs 104 pspm in 2015 and climbed to Rs 117 pspm in 2018. 

On the other hand, cities like Pune and Bengaluru have been the breakout markets in terms of office space transactions. The weighted average rental values have risen from Rs 37 pspm and Rs 46 pspm in 2012 to Rs 71 pspm and Rs 74 pspm in 2018 for the two cities. 

The completion rate of office spaces picked up, especially in Pune, in the period, and demand came from sectors like IT, BFSI and retail, among others.

In Mumbai, the range of rentals in office space is also higher than other cities, starting from as low as Rs 65 pspm to Rs 320 pspm, depending on area. Among these, in the last seven years, while the more expensive areas of South Mumbai have seen a decent correction in rental values, those in lesser costly areas like Navi Mumbai have picked up.

“If you look at rentals, expensive areas have seen a correction like South Mumbai, Colaba, Nariman Point, Cuffe Road, Worli, and Prabhadevi which are the costlier segment of the market. Here, Nariman Point has been relatively lower priced at Rs 180 pspm. However, share of transactions in cheaper areas like Navi Mumbai have risen in volume and are higher than the expensive ones. This has brought down the weighted average rental values in Mumbai since 2012 compared to other cities,” said Vivek Rathi, senior vice-president - research, Knight Frank.

Nonetheless, in terms of preference of occupiers, markets like Pune and Bengaluru have still taken the sheen off the other markets, said Rathi. “Around 3-4 years ago, these cities ranked low. However, in recent times, Pune and Bengaluru have attracted demand from IT, biotech, start-ups, e-commerce, and ensured occupancy levels of over 90 per cent,” Rathi added. 

For instance, in terms of office space transactions, while Pune has seen annual size double from 3 mn sq ft (msf) in 2012 to 6.6 msf in 2018, Bengaluru rose from 9.4 msf in 2012 to 13.4 msf in 2018, reaching the highest level of transactions among the top seven cities. 

On the contrary, Mumbai moved from 6 msf in 2012 to 7.9 msf in 2018.

Before the financial crisis of 2008, Mumbai had seen rental values reach a bubble, with some properties trading at over Rs 700 pspm. “If Mumbai carried a rental value index of 100 as per Q3 of calendar year 2008, then today as on first quarter of 2019 it stands at 61.6, while Mumbai’s suburbs is 79.8 index. This drastic fall has happened over the years as the office rental bubble burst gradually,” said Samantak Das, chief economist and head of R&D REIS, JLL India.