Monday, December 17, 2012

The decline and fall of nariman point and surrounding areas

When Air India recently called for bids to rent 18 of its 23 floors in its flagship building in Nariman Point, only two state run enterprises – the State Bank of India and the Sales Tax Department – showed any interest, that too only for a couple of floors each. Shocked at the tepid response, Air India mandarins called an emergency meeting of their auditors to find out what was wrong. Had the babus bothered to ask around, they would have figured that many of their iconic neighbours are also half empty and finding it equally hard to fill the space up.

 The problem, in fact, is with Nariman Point. It has been about two years since the south Mumbai enclave ceded the pride of being the city’s preeminent business district to Bandra-Kurla Complex, where commercial rentals are now the highest in the city, with an average of Rs 350 per square foot per month, a figure that goes up to Rs 600 for premium properties. In comparison, Nariman Point, which commanded similar rentals in its glory days in the mid-2000s, now settles for a humbling Rs 250.
It wasn’t always like this. What was envisioned as a business district for small and medium enterprises at the height of licence raj in the 1970s became Mumbai’s prime business centre over the next 20 years.
This was followed by the heady postliberalisation days when multinationals, keen to set up operations in India, thronged in and average rentals shot up to Rs 500.
In the mid-2000s, the decline began, as companies that wanted larger spaces began to turn to the newly established Bandra-Kurla Complex. By 2009, BKC was commanding as much premium as Nariman Point, if not more, and companies began the long march north. Even by these standards, 2012 has been Nariman Point’s annus horribilis. Rentals have been sliding unabated, vacancies have been piling up and there seem to be no takers for all the vacant space. Commercial rental data for the first three quarters of 2012 show that while the city’s average vacancy rate is 18 per cent, Nariman Point’s is 25 per cent.
Experts say this downward trend will continue for a few years before a crucial question faces the district: What next? When that point comes, these experts say, Nariman Point as we know
it today could become one big residential enclave for the very rich.

According to real estate experts, a combination of factors played a role in driving companies northward towards BKC and other suburban hubs. “The first reason is that there is no good quality space available in the area,” said Ramesh Nair, managing director (west India) of Jones Lang LaSalle, a commercial real estate consultant.

“Companies these days are looking at large spaces, like 30,000 to 40,000 square feet, with amenities like ample parking space, food courts, and gymnasiums. This kind of space isn’t
available at Nariman Point.”

But even when companies started shifting to BKC starting from 2009, most of the big companies still found value in having their front offices in Nariman Point. But of late, companies are shifting even their front offices to BKC. Almost all big banks like Standard Chartered, Deutsche Bank, and JP Morgan, which had front offices in  Nariman Point, have moved these offices to BKC.
“We saw a lot of advantages in moving to BKC,” said Mahesh Aras, chief administrative officer & head of human resources, JP Morgan India. “It has connectivity on the central and western railways and the expressways, making it a more convenient commute for 70-80% of our employees.”
Further, BKC provides corporates with the contiguous space that Nariman Point, with its multiple ownership pattern, could never offer them. “Our current location is in a standalone building exclusively dedicated to all our wholesale bank businesses. At Nariman Point, we had a staggered presence across floors in a multi-tenanted building,” said Aras.
Another reason companies have shifted from places in south Mumbai is safety, which is high on the priority list of MNCs and big Indian businesses. Most buildings in the area are more than 30 years old. On the other hand, of the 29 buildings in Mumbai that have received any kind of Leadership in Energy and Environmental Design ratings, an urban design standard, BKC has seven, all of them with either gold or platinum ratings, which means these buildings score highly in energy efficiency, water efficiency and have better indoor environmental quality. The final reason is that Nariman Point remains relatively expensive.
Though it does not cost Rs 500 per sq ft, the rent, at Rs 275 to Rs 300, is still prohibitive for small and medium businesses. In comparison, even state-ofthe- art buildings in Parel go for Rs 150. In short, the area no more gives companies enough bang for their buck.
To be sure, Nariman Point was not Mumbai’s first central business district. The earliest business centre was Ballard Estate, which was the city’s commercial hub in the late 18th century and early 19th century. Then, businesses slow moved to the Fort area, which ruled in the mid-19th century. As the city kept growing, Nariman Point was developed in the early 1970s to serve small businesses and establishments.

“If you look at any world city, the commercial centre keeps moving every 40-odd years,” said a self-employed professional who has had his office in Nariman Point for over 30 years and who did not want to be named for this report. “Offices were built in the range of 400 sq ft to 3,000 sq ft. While the small businesses rented or owned the smaller spaces, the big business houses had their own contained buildings, like the Mafatlal Centre.”
Just as Nariman Point had firmly established itself as the central business district, the central government opened up the economy in 1991. The multi-nationals came flocking. Almost every big bank or company that entered India opened a liaison office in Nariman Point.
“They were kind of testing the waters in the first 10 years,” said the businessman mentioned above. “And then when they saw that India was a good place to do business in and that they could move some of their operations here, they started looking for bigger spaces. This suddenly added an extra zero to their space requirement. Nariman Point just did not have that kind of space to offer.”
The MNCs were also discovering the perils of dealing with multiple landlords. If a company occupied even one floor in a Nariman Point building, they almost always had multiple landlords.
One landlord would want them to vacate and another would want them to pay a higher rent. In one instance, Chase Bank, which had its offices in the 7th and 8th floors of a building, had to take one of its two landlords to court to stop him from constantly harassing them with ad hoc conditions.

By the late 1990s, as corporates had woken up to the drawbacks of Nariman Point, a planned business centre had risen in the marshlands to the north of the Mahim Creek, at the other end of the island city. But there were no takers for this space back then.

“Developers had invested a lot in building Bandra-Kurla Complex but barring a handful of state enterprises, nobody would set up office there,” said the businessman. “It was a ghost town, just like Belapur in Navi Mumbai was at one point. The developers started breathing down the government’s neck. Something had to be done. That was when the government amended the Rent Control Act, making life difficult for tenants in Nariman Point.”

Under the new Maharashtra Rent Control Act of 2000, which replaced the Bombay Rent Control Act of 1947, the Brihanmumbai Municipal Corporation was given the powers to fix the property tax for a building on the rateable value as opposed to standard rent. This meant the BMC taxed landlords based on the value of their building and property tax shot up to 112 per cent of the rent. And when they had to pay higher taxes, the landlords started passing this burden on to the licencee.

“No company wants an open-ended liability,” said another businessman, who owns commercial
buildings in Nariman Point. “Though many societies disputed this change in the law, the government had virtually made Nariman Point unattractive for companies.” Thus began the shift to BKC, which started filling out in the mid-2000s and by 2009 hadfirmly established itself as Mumbai’s central business district.

Though BKC’s ascendency grew unabated through 2009-2011, this year has seen the beginning of a new trend. Mumbai now has not one but several business and commercial hubs – The Malad-Andheri belt in the western suburbs, Lower Parel-Prabhadevi-Worli axis in central Mumbai and the Thane-Navi Mumbai area in the eastern suburbs.

“This is one more trend we are seeing,” said Nair. “This year saw Mumbai get two very solid central secondary business districts. Companies looking at low cost and large spaces prefer the Western suburbs. And Parel today offers a lot of good quality commercial space; 3,000 sq ft in a Nariman Point building would get you at best one parking lot, whereas Parel will give you three, and at a much lower cost.”

This year saw companies rent about seven million sq ft in Mumbai, according to Balbir Singh Khalsa, national director, Knight Frank India. Nariman Point accounted for a mere 1.5 per cent. Lower Parel and Andheri accounted for 20 per cent each, and BKC’s share was 30 per cent. But the most space rented this year was in Thane-Navi Mumbai, which accounted for 35 per cent.

“Thane-Navi Mumbai, being in the sub-Rs 50 per sq ft bracket, is the most attractive place for entrepreneurs and small businessmen,” said Khalsa. “Thus, while BKC still houses the financial giants, Lower Parel is attracting the media industry and companies from the lower end of the financial spectrum. Almost anybody who interacts with customers directly goes to the Western suburbs. And the BPOs, KPOs, start-ups and those into back-end services for whom rent is an important factor are going to the eastern suburbs.” That has left Nariman Point with small family businesses, legal firms and self-employed professionals like lawyers and chartered accountants.

So what next for Nariman Point? Real estate experts see the downward trend accelerating in the next couple of years. “We expect vacancies in Nariman Point increasing,” said Nair.

Rental and capital values will gradually come down. And we foresee societies slowly coming together to discuss redevelopment.” Khalsa agreed the trend will continue.

“There are no new buildings coming up. Even as vacancies increase, people will keep moving out depending on the cost structure and there won’t be many people coming in,” he said. Based on this trend, the future of Nariman Point will go down one of two paths. The first possibility is that the present decline will continue for a few more years, forcing owners to think out of the box.

They may come to a consensus that they can’t let buildings lie vacant\ and decide to go for redevelopment. What was envisioned as the financial capital’s central business district may become a residential enclave full of gated communities for the rich.

Khalsa thinks this is most likely what will happen to Nariman Point in the next few years. “There is demand for top-class residential buildings,” he said. “South Mumbai is still the place to be for the influential. So with its sea view, exclusivity, and what not, Nariman Point will be an important location.”

The other option before Nariman Point will need a bit of government intervention, of the kind that nudged people towards BKC 10 years ago. If the government decides to give a fresh lease of life to Nariman Point and ensures better connectivity from the suburbs, then the business – albeit small and medium enterprises that will find it attractive – may come flocking back. It will not be the same as it was till a few years ago, but it will still be a commercial district of note.
“I don’t see any reason why this can’t happen,” said the businessman. “The courts are here, the seat of government is here. And the government banks are here. So, if your business has anything to do with the courts, finances, or the government, which is almost all business, then there is still a chance that Nariman Point can become a formidable business district. But the government needs to ensure that it doesn’t take more than 45 minutes to reach from Panvel or elsewhere. After all, two million people enter and leave Manhattan every day. Why can’t the same happen in Mumbai?”