Perhaps the two most important themes of world economic trends in the late twentieth century are deregulation and globalisation. Since India achieved independence in 1947, the economy has been shackled by overwhelming bureaucracy, a strong element of central planning, trade protectionism and financial controls. Slowly, belatedly, and somewhat erratically, this is all beginning to change.
Bombay, renamed Mumbai in 1995, is in the forefront of economic deregulation in India. Mumbai has always been the principal commercial city of India, and as the new century approaches, Mumbai has an opportunity to take its place amongst the great commercial and cultural cities of the world.
The opportunities are staggering, but with rapidly emerging opportunities go equally potent difficulties. Commercial property is arguably the most serious problem for business in Mumbai. In 1995, Mumbai achieved the dubious distinction of becoming the worlds most expensive city for offices, with top rents of up to Rs 400 per sq ft per month. Despite a significant decline in office rents in 1996, part of a much wider real estate crash in the city, Mumbai remained top of the international league of office occupation costs in an early 1997 survey by Richard Ellis, with top rents of over 80 per sq ft. Decent quality residential property is also scarce and prohibitively expensive.
Until now, property decision makers in Mumbai have faced extreme difficulties finding appropriate space on sensible terms, and that includes new and expanding local businesses as well as overseas base companies. There has not been a systematic and independent study of the Mumbai office market, presented in a form which would be familiar in all other great cities which aspire to world city status.
If Mumbai is to become an influential city on the world stage, it will have to accommodate the wishes and operating practices of foreign corporations. Multinationals are an unforgiving breed. If they cant achieve certain standards, they will go elsewhere. Like it or not, Mumbai will have to conform, and that process will have a profound effect on real estate markets. Developers who understand international standards will flourish, the rest will languish.
One of the principal difficulties all companies in Mumbai face when seeking to acquire or dispose of property is the almost complete lack of reliable information on prices, trends, lease structures and market practices. In short, commercial and residential property markets in Mumbai lack transparency.
Market distortions
The volatility of property pricing is a sure sign that short-term pricing levels are fixed according to marginal supply and demand factors. In other words, a relatively small increase in demand with no corresponding increase in supply leads to a marked uplift in rents, and vice versa. Deregulation in any market invariably creates short and longer term upheavals in demand patterns, and the Mumbai office market is no exception, as it struggles to cope with the increased demand which inevitably followed Indias liberalisation policies since 1991.
Polite commentators on the Mumbai planning system describe it as an administrative morass. Since the late seventies, strategic planning policy in Mumbai has been to restrain the growth of employment in the south of the city, and guide it to defined locations in the north of the city, the suburbs and Navi Mumbai on the mainland, only 12 km as the crow flies across the sea to the east from the Gateway of India.
In effect, there has been a ban on new office development in the south of the city since 1978, although a limited number of Heritage Buildings have been converted like the Tata Palace for Deutsche Bank. Detailed development plans are being prepared for the whole city since 1991, but a map for south Mumbai is not yet available.
In addition to planning policy controls, new development is significantly hindered by the operation of the Urban Land Ceiling Act, which applies to all urban areas in India and has as its main aim to ensure that when redevelopment takes place in urban areas, a significant proportion of the land becomes available for low cost housing. The two main planned areas which are earmarked as huge new commercial and office centres to counterbalance south Mumbai are Bandra Kurla and Navi Mumbai. Both have failed to meet expectations. The result: development has been stymied in the south, and only limited alternatives are available elsewhere.
Nariman Point
This is the office district which gets all the international publicity, putting it at the top of the international office rental league tables in 1996 and 1997. In fact, the occupier profile of Nariman Point is in a constant state of flux. Given that the amount of office stock is finite, nothing is being built, pricing levels reflect the balance of arrivals and expansion versus departures. Experienced market watchers have noticed a sharp increase in departures over the past year, as both Indian and domestic occupiers relocate to cheaper, usually suburban locations.
At the same time, the rate of arrivals and expansion has slowed down for three main reasons:
The initial wave of new arrivals post 1991 has inevitably slowed as the major international investment banks and camp followers settle in;
More recent arrivals in Mumbai, particularly in high-technology and manufacturing sectors, but also in financial services, including Lehman Brothers and Banque Paribas, are heading more readily for newly emerging office markets in central and north Mumbai, or bypassing Mumbai altogether and locating in New Delhi;
The so-called liquidity crunch and depressed state of the Bombay Stock Exchange since 1995 has inevitably depressed the formerly extremely buoyant capital markets community, causing expansion plans to be put on hold.
In short, Nariman Point is losing some of its commercial charisma or magnetism for overseas companies. It would, however, be completely misleading to suggest that demand in Nariman Point is not substantial, and our view is that, in the medium and longer term, demand is fundamentally strong from companies already based at Nariman Point.
For any office market to remain competitive and attractive to international occupiers, it needs a steady supply of new buildings to meet the operational needs of the worlds leading edge companies. Nariman Point is slipping back, and that is not a formula for long-term success.
It is also not something which the city of Mumbai should view with equanimity. To create an office quarter with an occupier profile to match the best in the world, as Nariman Point has done, is a supreme economic achievement. To allow that critical mass of corporate excellence to be diluted is short-sighted and risky. For example, the city of London, with its hundreds of years of history as a world class financial and business centre, is now using all its resources to protect its business status against competing centres in London and indeed throughout the UK and Europe. Excellence must never be compromised or risked, and Nariman Point may be falling into that trap, following the heady years of 1991-1995.
International playground
There is widespread recognition in both the private sector and amongst the governing elite in Mumbai and Maharashtra, that the property industry in its widest sense has to be deregulated.
Mumbai property prices are of worldwide interest. These new buildings are needed in south Mumbai, not just at Bandra Kurla, the suburbs and Navi Mumbai. Most local experts argue that new development must continue to be severely restricted in south Mumbai to reduce congestion, and because there is no land. We profoundly disagree.
It is shortsighted to compromise a centre of excellence such as Nariman Point, by preventing development. At VT the potential exists to build an office complex of a scale, quality and efficiency to match Broadgate in London or Battery Park City in New York. International developers would form a queue to get involved with local joint venture partners. The choices are there, the decisions will be made by the people of Mumbai.
[This is an excerpt from India Property Research, a report brought out by Chesterton Meghraj, a real estate consulting firm.]
One of the principal difficulties all companies in Mumbai face when seeking to acquire or dispose of property is the almost complete lack of reliable information on prices, trends, lease structures and market practices.
