When it comes to real estate, Mumbai is a city of superlatives. Billionaire industrialist Mukesh Ambani’s $2bn (£1.3bn) Antillia Building, which looms over upmarket south Mumbai, is commonly thought to be the most expensive residential property in the world after Buckingham Palace. The gawky 27-storey structure features helipads, a health centre and a ballroom.
At the other end of the social spectrum is Dharavi, Asia’s largest slum, which sprawls over some 500 acres in the West of the city, a stone’s throw from the burgeoning financial district of Bandra.
Dharavi, setting of the film Slumdog Millionaire, is home to a population estimated to be anywhere between 300,000 and 1m, and is a hive of small, informal industries ranging from laundries to leather production – “a special economic zone for the poor”, as one American journalist put it.
The city’s commercial property market is similarly characterised by extremes. Mumbai offices have the highest yields of all the top 15 global office markets as ranked by Knight Frank, at 10.3%. This compares with cities such as Sydney, Washington and Shanghai, which produce rental yields of 6.3%, 6.2% and 6% respectively.
Residential property has contradictions of its own: the city has a glut of unsold properties. Knight Frank estimates that the number languishing on developers’ books in Mumbai today is around 214,000.
And this is in a country whose major cities face a combined shortage of at least 18m homes and where gruelling commutes of two hours each way from distant suburbs are the norm for priced-out young professionals.
It is a high-stakes market: volatile, difficult to navigate and at times paradoxical, but with powerful demographic drivers and the tantalising promise of double-digit returns for those who get the formula right.
In a global environment where decent yields are becoming harder and harder to come by (be they in bonds, stocks, or property), and institutions under growing pressure to meet performance targets, Mumbai’s real estate market offers the possibility of returns that few other global gateway cities can match.
But it also poses some wider questions for the international real estate community about how much of their own money – and other people’s – investors are prepared to risk in order to find those elusive profits.
This was a central theme at the IPD/IPF Conference in the less exotic location of Brighton last month. As Sabina Kalyan, chief economist at CBRE Global Investors, put it: “Real estate investors are at a point where they must decide whether to adjust their expectations, and tell their clients to accept that we are simply moving to a point in the cycle where returns will be lower, or to go into riskier assets or cities on the hunt for higher yields.”
Recovery play?
So where should investors considering Mumbai start to look?
As the financial powerhouse of India, Mumbai’s office market is the first obvious port of call. But it has had a challenging couple of years following the global financial crisis.
The vacancy rate is the highest of all of the top 15 global cities, at 23% (compared with 6.1% in London and 8.1% in Paris) according to Knight Frank. However, the market is “on the cusp of a recovery”, according to Viral Desai, Knight Frank’s Mumbai-based director of office transactions.
“Other Indian office markets are more driven by tech and business process outsourcing, and recovered from the crisis quicker. Mumbai was hit harder,” he says.
A glut of supply and reticence on the part of corporate occupiers, which have been waiting for the outcome of the election and the return of economic stability before committing to leases, mean that the market has been stuck in the doldrums since the crash, Desai says.
The past quarter’s take-up figures were not particularly encouraging. Rents in Mumbai’s central business district were down by 11% year-on-year in the third quarter, and absorption has dwindled to 1.45m sq ft over the year-to-date, a third of the total at this time last year, according to Colliers International.
But Mumbai may have reached the inflexion point. Desai says: “Occupiers that have been sitting on the fence for a while are now finally starting to make decisions. We are currently looking at enquiries for a combined 5m to 6m sq ft of Mumbai office space.”
Desai, who has just signed a deal with American mass-media giant Viacom for a 10-year renewal of its lease on a 150,000 sq ft office in Andheri, in the western suburbs, is confident that occupier demand will strengthen from here, and predicts that rental values will appreciate by around 20-25% in the next 18 months.
Vikas Chimakurthy, director of Kotak Realty Fund, the real estate fund management arm of Mahindra Bank, also believes that the office market’s fortunes are beginning to turn.
“It is a good dynamic at the moment. The oversupply is tapering off because of a lack of new construction over the past two years, and international tenant demand is coming back strongly,” he says.
High-stakes housing market
A growing middle class and high inflows of migration from other parts of the country mean that the fundamentals for the Mumbai residential market are exceptionally strong.
But investors be warned: Mumbai’s dramatic residential price fluctuations supply more drama than a Bollywood movie, and seem to consistently defy market fundamentals.
Despite a high level of unsold units, prices keep going up. The weighted average capital value of housing in the Mumbai metropolitan region increased by 4.1% in the first half of 2014 despite the fact that sales were 25% lower than the same period last year. Price growth is expected to exceed 10% for the full year, according to Knight Frank.
For Manish Bhandari, chief executive of Mumbai-based asset manager Vallum Capital, the city’s luxury residential market “has all the characteristics of a bubble” thanks to high levels of speculative buying, and should be approached with extreme caution.
“There is a very strong culture of buying real estate and gold as a wealth preserver in India. Our house view is that residential is very overvalued,” he says.
Affordable housing, however, is more in tune with fundamentals – but has yet to receive much attention from commercial developers. “The margins on affordable housing simply aren’t high enough to appeal to most developers, and because time taken to secure permits impacts IRR,” says Kotak’s Chimakurthy.
Mumbai’s middle-income plan
A handful of developers are either active in the market or planning projects: Godrej Properties and Mahindra Housing both announced plans this autumn to develop middle-income homes in outlying suburbs of Mumbai.
But few, if any, have found the magic formula for delivering development that meets the needs of middle and lower-income groups while also being commercially viable.
One organisation that is attempting to find the balance is the enigmatic Saifee Burhani Upliftment Trust. SBUT is an initiative of the Dawoodi Bohras, a sect of Shia Islam known for its global connections and entrepreneurial vision, to develop 3,200 homes at a 16.5-acre site at Bhendi Bazaar, in the heart of Mumbai. The Bohras make up around 70% of the inhabitants of the 19th-century bazaar district, according to SBUT’s estimates. Around 20% of the masterplan is made up of apartments to be sold on the open market, which should recoup the cost of the development.
“Mumbai is sitting on a time bomb,” says Abbas Master, the project’s chief executive. “We are in urgent need of new homes and new infrastructure. Much of the housing in this neighbourhood is falling down and simply unsafe for habitation.”
He is quick to stress that the development is not just for Bohras, but for residents of all religious and ethnic groups.
So far, the challenges have been considerable. After spending several years of hard work acquiring more than 50 separate development permits, SBUT is now in the process of shifting the first batch of residents of the bazaar to transit homes in a specially built high-rise block a few kilometres down the road. They will live there at SBUT’s expense until their new homes are completed – and then given them for free. Not everyone is happy about the development, and getting to this stage has required lengthy community dialogues, Master says.
Another uniquely Indian problem is that SBUT has an on-site mausoleum where the community’s two most recent spiritual leaders are buried. Raudat Tahera, or the “Garden of Purity’’, is the only building in the world to have the entire Koran inscribed on its walls. It stands shielded under a giant white canopy while the demolition takes place around it.
The project is being financed by “internal sources” and is entirely debt-free, Master explains. Because of this unusual (and mysterious) funding, and its links with a large and powerful religious community, this is undoubtedly a one-of-a-kind project rather than a
replicable model for others in the private sector. Nevertheless, Master says he hopes it will inspire other developers to engage with the problem of how best to develop urban housing for lower-income groups.
A step too far?
Mumbai is an exciting play for the investor chasing punchy returns, but is fraught with challenges.
Investors have the chance to catch the Mumbai office market at the bottom of the cycle, but a rebound remains purely academic at this stage.
The housing market provides a massive opportunity, but investors must make a call on whether they can stomach the high volatility of pricing, and the sheer human and political challenges of developing in built-up areas if they get involved with projects at the construction stage.
Even in a world where investors are under pressure to hunt for yields, Mumbai may still be a step too far for all but the bravest and most patient.
Bribery, corruption and red tape
It is impossible to discuss Indian real estate investment without dealing with the thorny issue of corruption and bribery. A 2013 EY survey of domestic and international investors showed that real estate was perceived as the most corrupt sector of the economy.
A number of high-profile scandals have rocked the industry in recent years. Ashok Chavan, the chief minister of Maharashtra (the state in which Mumbai is located) was forced to resign in 2010 after being accused of criminal conspiracy and criminal misconduct related to the sale of government housing for war widows to politicians and military officers at below-market rates. Chavan has denied any wrongdoing. The trial continues.
The Mumbai real estate market is a particular magnet for corruption, says Aashish Aggarwal, South Asia director of client services at Control Risks Group. “The city has some of the highest capital values in the country, if not the world. The bottom line is potentially huge. There are people who will try to manipulate transactions for their own gain.”
It is not just real estate that is the problem. India as a whole is grappling with a deep-seated culture of bribery. A separate EY survey of senior executives working in the country revealed that 73% had to “bargain hard and factor in the cost of corruption at the time of entering transactions”.
Thus far, a slightly worrying set of indicators for the prospective real estate investor. “India is one of the toughest real estate markets in the world for an investor to be in, but potentially one of the most lucrative,” says Dhruv Phophalia, managing director at Alvarez and Marsal’s Mumbai office. “There is lot of red tape here, and that is part of the problem.”
Acquiring land and gaining planning permission is the juncture at which real estate is most vulnerable to corruption, Phophalia says, as developers may feel under pressure to bribe officials to speed up an often lengthy process.
“You will rarely see any land transactions in India that are free of ‘black money’,” he says. So what steps can overseas companies take to protect themselves – and to ensure that their investments remain clean?
The most important thing an investor can do is to pick a good local partner – and to do extensive due diligence on them before committing. Since the bulk of commercial real estate activity involves the construction of new projects rather than transacting completed assets, this will generally mean partnering with a local developer.
Property magnate Donald Trump is one investor who has recently gone down this route, announcing a partnership with blue-chip developer Lodha Group to develop a 72-storey residential tower in Worli, one of Mumbai’s priciest neighbourhoods. Similarly, Blackstone is one year into a joint venture with Bangalore-based Embassy Realty Group to acquire office parks. The pair have since signed India’s largest commercial letting of more than 3m sq ft at a Bangalore office park with Indian e-commerce giant flipkart.
But how do new entrants to the market go about making such a critical decision? Control Risks Group’s Aggarwal says: “Don’t just do due diligence at the company level. Look into the background of the individuals involved. What is their track record? Are they credible? You have to look at the whole spectrum.”
sophia.furber@estatesgazette.com
