Mumbai’s ambition of becoming a global financial centre will unravel if the exorbitant rent that ABN Amro Holding NV recently agreed to pay to retain its presence in the city’s commercial district becomes the norm.
According to an article this week in The Times of India, the Dutch bank’s Indian unit renewed the lease for one of its offices at Sakhar Bhavan in Nariman Point, Mumbai’s main business district, for Rs500 ($12) a month per square foot. That rent, the highest ever in India, is almost three times the rate the bank was paying for the premises until now, the newspaper report said. It’s also double the going rent for prime office space in Singapore. Even Dubai, with its petrodollar-fuelled real-estate frenzy, is cheaper.
“There’s currently a huge supply crunch of quality office space in Mumbai,” says Anuj Puri, chairman of Jones Lang LaSalle Meghraj, a real-estate consulting firm. “All financial institutions want to be in the central business district, and there are presently no feasible alternatives.” Sky-high Mumbai rents are all the more ridiculous considering that most of the city’s real estate is a dump and urban amenities are woefully inadequate. “Mumbai in no way matches the infrastructure and quality available elsewhere in the Asia-Pacific sector,” Puri says.
The Indian economy is growing faster than its potential. The median forecast of economists in a Bloomberg News survey last week was for gross domestic product to expand 8.8% in the current fiscal year. While the business cycle may have accentuated Mumbai’s real-estate deficiency—just as it has caused the market for traders and investment bankers to tighten, pushing up financial sector wages—the core problem is structural.
The city’s vertical growth has been stunted by overly restrictive floor-space-index norms; supply of land has been stymied by a draconian Urban Land Ceiling Act, which was brought in to curb hoarding but has ended up discouraging genuine and economically beneficial transactions. At the same time, demand for office space in Mumbai is soaring because of a surge in the flow of money and deals, in line with what one would expect to see in the world’s second- fastest-growing major economy. With merger-and-acquisition volumes in India doubling this year to $64 billion, India has become Merrill Lynch & Co.’s top revenue earner in Asian emerging markets, Financial Times reported, citing the company.
MasterCard Inc., the credit card company, recently ranked Mumbai 10th among worldwide centres of commerce on “financial flow,” ahead of Shanghai, Hong Kong, Sydney and Singapore. ABN Amro, which already occupies most of the 12-storeyed building, may have paid a premium for the third-floor office to keep its operations in one location and save on administration costs, says Gaurav Bahirvani, an associate director at property brokerage Colliers International in Mumbai. Still, the transaction is not an outlier. “Prices at Nariman Point have certainly risen over the last nine to 12 months,” Bahirvani says.
Even before the current bout of rental escalation, Mumbai offices were the third-most-expensive in the Asia-Pacific region after Hong Kong and Tokyo.
Mumbai’s urban planners should realize that the city’s acute space crunch is now spiralling out of control, and that work on a brand new financial district must begin immediately. Sanjeev Sanyal, a Deutsche Bank AG economist in Singapore, has an interesting proposal to reinvent the mostly defunct old port on Mumbai’s eastern seaboard as a finance hub. The strip of land that starts near Fort—where the central bank and the Bombay Stock Exchange are situated—and runs northward along the city offers interesting possibilities for new, sea-facing architecture, Sanyal says. “Virtually all of Mumbai’s iconic buildings and public spaces belong to the colonial period,” he says. “The city needs new architecture to serve its citizens as well as to reflect its role as the dynamic financial hub.”
The Mumbai Port Trust owns 1,800 acres on the eastern harbour. Most of the land is underutilized: space that could be used for offices, condominiums and museums is now occupied by warehouses. Mumbai-based Kamala Raheja Foundation and the Urban Design Research Institute published a study in 2005, recommending that the eastern waterfront be rebuilt. It’s time the planners married that proposal with the larger goal of turning Mumbai into a global financial centre.
“The exorbitant cost of real estate in Mumbai could inhibit its emergence as an international financial centre,” a government-appointed committee of bankers, bureaucrats and the securities regulator warned recently. By 2025, Indian households and firms are expected to buy $120 billion in cross-border financial services.
It’s too big an opportunity to lose because of a shortage of office space. Not only will unused docklands ease that crunch, but they will also help the congested agglomeration of 19 million people find the room Mumbai needs to become a more livable city and a centre of finance.