MUMBAI: Relentless rise in demand for office space

By Ravi Velloor, India Bureau Chief

NEW DELHI - EIGHTEEN months ago, when Mumbai real estate consultant Sanjeet Narain made arrangements for the British Broadcasting Corp’s new office in the city’s Bandra Kurla Complex (BKC), the rent was 120 rupees (S$4.50) per sq ft.

These days, the going rate for office space at BKC, as Mumbai’s emerging financial district is called, ranges from 350-400 rupees psf.

‘Demand is ever growing. Everyone seems to want to be here in Mumbai - whether you are into logistics, telecoms or any other business you can think of,’ said Mr Narain, managing director of Narains Corp, a top real estate firm in India’s business capital.

‘Right now, I am just helping to place a Swiss chocolate-maker in Andheri East,’ he says, referring to a less fashionable suburb further away. ‘Andheri rents now have reached where BKC was less than two years ago.’

Indeed, a recent lease for Droege & Co Singapore was fixed at 100 rupees psf for the 2,000 sq ft of space the consultancy hired.

As India’s economy expands at a steady 9 per cent on average, global firms are arriving to cash in on the boom, running headlong into established Indian players intent on expanding their operations.

While the housing market has softened, thanks to the central bank’s interest rate hikes, demand for quality office space shows no signs of abating. The result has been escalating rentals. The capital value of Mumbai’s office buildings rose 123 per cent last year, outpacing Singapore, according to a recent report by Jones Lang LaSalle.

Such property escalations are bound to affect business, even in a red-hot economy like India’s.

Many firms have moved out of Mumbai to locations where offices are cheaper and travel times shorter. Retailing, for instance, is increasingly based out of cities such as Bangalore or Hyderabad.

‘Cost escalations are taking place across all asset classes,’ said Mr Sameer Wagle, associate director of the investment management arm of Mumbai-based IL&FS, an infrastructure leasing and finance company. ‘But real estate is the hottest because of the Indian mentality to invest in fixed assets.’

Even so, he says, the lure of the billion-strong Indian market is so strong that most companies take the rental costs in their stride.

‘It is the shortage of talent that is their bigger headache because of rising salary costs,’ he added.

Still, some parts of India are beginning to register small declines.

In Gurgaon, on New Delhi’s western suburbs, which has become a fashionable location for back-offices of multinationals and upper-class residences, office rentals have cooled in recent months.

‘Thanks to a whole lot of new malls and office buildings, you can buy good quality office space for about 12,000 rupees psf, down from 15,000 rupees a few months ago,’ said chief executive Rajeev Sharma of New Delhi real estate firm Alpha Estates.

In Mumbai, the government is trying to change the Urban Land Ceiling Act of 1976 that limits the land available for development. According to Chief Minister Vilasrao Deshmukh of Maharashtra state, as much as 500 ha may be freed up for office buildings.

But for now, space is so tight that vacancy in the central business district area was at a record low of 2.1 per cent in the first quarter of the year.

Source: The Straits Times, 30 July 2007