Originally published in the Times Of India on 4th November, 2011
With storm clouds gathering again over the global economy, the commercial office space market in Mumbai is losing its momentum. A handful of foreign banks are holding off on large realty deals, in part to gird for any possible turn the world economy may take.
About eight months after it signed a letter of intent, Citibank India, it is learnt, is taking time before sealing the purchase of 2.97-lakh sq ft space in FIFC Tower at Bandra-Kurla Complex (BKC), which is constructed by Purnendu Chatterjee promoted-TCG Urban Infrastructure and New York-based realty firm Vornado Realty Trust. Worth about Rs 1,000 crore, the deal would have been the largest ever transaction for commercial space in Mumbai. Till recently, it was ironing out issues such as the building's naming rights, car parking and interior fittings.
Similarly, HSBC is deliberating harder about leasing 2.5-lakh sq ft office space in the under-construction Indiabulls Financial Centre at Elphinstone. And Deutsche Bank, which was seeking an office space of 1 lakh sq ft, is first studying all possible options.
The lease transaction between Sahara Group and Parinee Developers-which at Rs 70 crore a year for 2.5 lakh sq ft space is the biggest ever for a commercial property-is also temporarily held up.
But Amit Goenka, national director, capital transactions of Knight Frank, confirmed the slowdown in the commercial office space market. He said: "The renewed fears of economic crises in the West are forcing companies to rethink their expansion plans. Many big office deals are not going through because the global heads want their companies to remain cash rich.
"They say that while India and Asia Pacific may be doing good, Europe is not. So, all decisions have been shifted to the next fiscal year. Furthermore, there is a situation of oversupply in the commercial office space market, so rents would reduce."
Global property consultant CBRE, which brokered the deal for Citibank, and TCG spokespersons too refused to comment. However, an industry expert argued that the Citibank management is thinking hard before giving its nod to the deal. "We believe the deal would spill over to next year. Citi is in no hurry though it would be expanding and is in need of space. It may even redevelop its existing building by purchasing FSI from the MMRDA," said the expert.
Industry insiders say HSBC decided in favour of more deliberations before leasing the Indiabulls space for two reasons. "They had some queries on development issues, whether a bank is allowed to operate in the information technology park. Secondly, since they have announced consolidation plans, it might not be right to be seen investing a large amount of money in one country," said a property consultant.
Property consultants say there is bound to be an oversupply of office space soon, with vacancy rates expected to peak in 2012. In Mumbai, 26% of the current available office space of 50 million sq ft is lying vacant. "In the next two years, 14.8 million sq ft of office space will hit the market. However, only 4.8 million sq ft will be either leased out or purchased. As a result, the commercial office rates are going to fall," said the head of a leading property consultant.