Foreigners dumping realty? Morgan Stanley pulls out of major Mumbai project

The global real estate fund of Morgan Stanley, which was in talks with the Wadhwa Group to invest aboutRs 900-1,000 crore ($186 Million) in an office development project in Mumbai, has now shelved its investment plans as the rupee's plunge has made the hedging cost for the entire deal too huge, The Economic Times reported today.

The investment by Morgan Stanley Real Estate Investing (MSREI) was proposed to be deployed in jointly developing 1.6 million square feet office space in Mumbai's financial hub Bandra Kurla Complex.

Mumbai-based Wadhwa Group had already begun construction of the project, ONE BKC, which would consist of two office towers and is due to be completed by 2014.

Are foreign investors shying from Indian realty?

Are foreign investors shying from Indian realty?

MSREI has invested about $850 million in Indian real estate, mainly in residential projects, including $100 million to $125 million in a housing project by Mumbai-based Sheth Developers, Reuters reported in December 2011, and the ONE BKC project would have been its first investment in commercial real estate.

"Returns that were arrived at in earlier negotiations between Morgan Stanley and Wadhwa were shrinking even before concluding the deal," one of the people familiar with the deal told ET as the rupee has slipped 46 percent in the last two years, wiping out returns of several PE funds.

The pull out comes even as Wadhwa has been marketing ONE BKC as offering office spaces designed to suit occupiers of all sizes.The company has been using this as its USP by offering office spaces of as small as 1,000 square feet as it targets professionals like chartered accountants and law firms.

"This deal is already very costly and there is high vacancy in BKC. Not just the Wadhwa Group but even Godrej Properties has a huge office complex there where absorption rates are very low. Add to the economic gloom and a horrible hiring outlook... Post Lehman Brothers, commercial real estate has been going South and BKC is largely a finance and banking sector, which is under maximum pressure right now," said Pankaj Kapoor, MD at real estate research firm Liases Foras.

Data from property consultant CBRE shows Mumbai's BKC is the eleventh most expensive office market in the world. Clearly when there is a slowdown and corporates are looking to cut costs, MNCs wouldn't want to shell out more as rent, which is why several corporates move out of expensive offices in BKC to relocate at low-cost locations such as Andheri East, Goregaon and even Parel.

In Mumbai, Johnson & Johnson took up 150,000 sq ft in Andheri East moving from more expensive Worli whileFranklin Templeton India moved out of Wockhardt Towers in BKC and shifted to Indiabulls in Lower Parel, where rentals are as low as Rs 125 a sq foot, and Volkswagen moved out from Maker Maxcity where it was paying Rs 500 a square foot to Andheri-Kurla road where rental is Rs 130 a square foot a month.

Knight Frank data also showed that bulk of office space transactions during the fourth quarter of financial year 2013, took place in the suburban business districts of Andheri and Goregaon.

"Andheri East and Goregaon East accounted for a massive 92% of the transactions in Mumbai," the report said.

A report by a Cushman & Wakefield says office relocations and consolidation of space have more than doubled in the first half of 2013 against last year and companies have managed to reduce their rents by 25-30 percent.

In fact, property consulting firm Knight Frank points out thatwhile the rental value ranges between Rs 200 and Rs 350 in BKC, it is any where between Rs 125 and Rs 190 a square feet in Central Mumbai (Lower Parel, Dadar, Prabhadevi) and between Rs 50-Rs 100 in Andheri, Josgehwari, Gorgaon and Malad.

Moreover,sluggish leasing in business districts and new supply led to vacancy levels rising in office spaces.Mumbai saw a 10 percent decline in office demand in the first half of the year due to subdued economic conditions at domestic as well as international levels, the Cushman report said.

Updated Date: Dec 20, 2014 23:16 PM

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