ICICI Prudential has recently bought an entire floor of 60,000 sqft (chargeable area), a pre-leased commercial unit at Crescenzo building, BKC for INR 147 crore in February 2017. The leased property is currently occupied by Tata Communications at rent of INR 177 per sqft per month (on chargeable area). The buyer, ICICI Prudential, also receives proportionate undivided interest of 5.19% in the land.
The purchase price is equivalent to INR 24,500 per sqft on chargeable area & INR 40,960 per sqft on carpet area.
Trend of falling cap rates in Mumbai’s commercial market is evident from such transactions of pre-leased office properties in major micro-markets such as BKC and Lower Parel. The current and passing yield achieved by the buyer in above mentioned transaction is 8.46% and 9.01% respectively. 2 years ago in Q2CY15, a pre-leased property in the same building (Crescenzo) achieved cap rate of 10.01%. Similar trends can be seen in other micro-markets of Mumbai. For example, cap Rates in Lower Parel have fallen from highs of ~11.8% in CY11-12 to ~10% in CY15 and further to below 9% in CY16.
We foresee further yield / cap rate compression in commercial office markets in Mumbai in line with our view that the rise in capital values will outpace rise in rental values over the next 2-3 years. Demand-Supply dynamics in Mumbai office markets, especially BKC supports our hypothesis as demand for pre-leased space having Grade A tenants in Grade A buildings far exceeds supply.