The “Maximum City” has potential rental escalation of up to 40% post upgradation

by Priya jadhav

· Mumbai has a potential to upgrade 44 million sq. ft. of Grade A office space

· The city presents an INR 2,600 crore investment opportunity

· Rental escalation opportunity of up to 40%, post upgradation

Mumbai, March,2020 – Mumbai, the financial capital of India and the hub of all its economic activities, has been the preferred front office location for most corporate occupiers. As the city grew, the centers of business activity moved towards the North. The traditionally established Central Business District (CBD) gradually lost its sheen and Bandra Kurla Complex (BKC) is now the de-facto CBD with gleaming office buildings and impressive residential towers.

“New developments in the CBD were restricted by the unavailability of land and the older buildings were in disrepair—a majority of office buildings in Mumbai’s CBD are at least four decades old with run down structures arising from poor maintenance” says “Futureproofing 2.0 - Upgrading Commercial Assets to Create Lasting Value,” report released today by JLL, the largest real estate service firm in India. The declining appeal of the CBD for occupiers is further reflected in falling rentals and occupier shift.

 “The stock of Grade A office space in the CBD has remained stagnant, while that in the SBDs, suburbs and peripheral markets grew rapidly. With submarkets like BKC, BKC Fringe and SBD North saturating in terms of land availability, the supply of Grade A office spaces in the next five years is mainly concentrated in the peripheral submarkets,” says the report. Navi Mumbai accounts for 37% of the upcoming supply in the city over the next five years, mostly for IT/ITeS occupiers.

Potential upgradation of 44 million sq. ft. Grade A office space

High vacancy rates and falling rentals in the CBD, rapidly evolving preferences of occupiers and limited scope for further development of premium office spaces even in the SBDs provide an indication of how critical it is for building owners to refurbish their buildings. In the city, the quantum of existing Grade A office stock that was completed 10 years ago stands at 43.8 million sq. ft. In terms of number of buildings, this is 50% of the total stock in Mumbai.

“In this era of change, the biggest characteristic that defines today’s workplaces is continuous innovation. With a diverse working population spanning baby boomers to “Gen Zs”, it is time to futureproof commercial spaces including offices to meet the emerging needs of a demanding workforce as well as deliver on the community’s sustainability promise,” said Ramesh Nair, CEO & Country Head, JLL. “In addition, these urban regeneration and revitalisation projects go a long way in re-building a city’s urban character and help revitalise the local economy - often giving back the city its pride by rebuilding its iconic skyline,” Ramesh added.

The city presents an INR 2,610 crore investment opportunity

The resultant investment potential in upgrading Grade A buildings in Mumbai is a whopping INR 2,600 crore with a payback period of around three years. As mentioned in earlier sections, such upgradation involves various components ranging from safety and security to human experience and technology. The need for upgradation and the importance of its various components vary across the city. More importantly, the required capex depends on the building in question and its location.

Submarket	Investment Opportunity (INR crore)
BKC	330
BKC Fringe	130
CBD	480
East Suburbs	290
Navi Mumbai	190
SBD Central	200
SBD North	360
Thane	30
West Suburbs	600
Total	2,610

Source: Real Estate Intelligence Service (JLL), JLL Research

“Out of the total upgradation potential of over 40 mn sq ft, BKC, CBD & West Suburbs markets will remain the key drivers. The human centric design elements of an upgraded office space with better aspects like operational efficiency, operating costs, technology, community, sustainability and  Wellness, safety and compliance, make them more appealing for not just the young workforce but instantly heightens the opportunity for investors to retain their clients, increase rentals and enhance their asset value,” said Aditya Desai, Executive Director and Head of Developer, Investor Services for India at Projects and Development Services (PDS), JLL.

Rental escalation of up to 40% possible, post upgradation

With the required capex for upgradation varying across submarkets, the potential increase in rentals depend on factors such as planned infrastructure development and proximity to residential neighbourhoods that influence the attractiveness of the submarket to occupiers. BKC, which is a highly sought after office destination, offers the maximum scope for rental escalation while peripheral submarkets like Thane offer very limited upside.

BKC offers maximum rental escalation

Submarket	Rental Range (INR psf)	Rental Escalation range post upgradation
BKC	165-365	15%-40%
BKC Fringe	115-190	10%-25%
CBD	145-230	10%-30%
East Suburbs	70-125	12%-25%
Navi Mumbai	40-100	10%-25%
SBD Central	145-240	10%-30%
SBD North	80-140	10%-30%
Thane	50-75	8%-12%
West Suburbs	75-150	12%-30%

Source: Real Estate Intelligence Service (JLL), JLL Research

It is clear that most buildings in the CBD need to be upgraded to remain attractive to occupiers. While the West Suburbs provide the maximum investment potential in upgradation, BKC delivers maximum upsides to office asset owners with rental escalation. With a combined investment opportunity of more than INR 1,400 crore, these three submarkets are the most prominent options for investors looking to capitalise on the upsides of upgradation.

About JLL: JLL (NYSE: JLL) is a leading professional services firm that specializes in real estate and investment management, headquartered out of Chicago. A Fortune 500 company with annual revenue of $16.3 billion, JLL operates in over 80 countries and a global workforce of more than 93,000 as of September 30, 2019. JLL is the brand name, and a registered trademark, of Jones Lang LaSalle Incorporated.

In India, JLL has an extensive presence across 10 major cities (Mumbai, Delhi NCR, Bengaluru, Pune, Chennai, Hyderabad, Kolkata, Ahmedabad, Kochi and Coimbatore) and over 130 tier II & III markets with a cumulative strength of close to 12,000 professionals. Headquartered out of Mumbai, we are India’s premier and largest professional services firm specializing in real estate. Our services cover various asset classes such as commercial, residential, industrial, retail, warehouse and logistics, hospitality, healthcare, senior living, data centre and education. For further information, please visit jll.co.in