Rising Values Spur Concern
About Overheating in Mumbai

Real-estate values in certain parts of Mumbai are rivaling prices in some of the world's ritziest cities and raising concerns that the market is overheated.

The rise in rents and land values in Mumbai, formerly known as Bombay, comes as new construction has failed to keep pace with the demand for modern commercial and residential space coming from the increasing needs of Indian, U.S. and European companies and India's expanding middle class.

Office space in the city's central business district is attracting international and U.S. financial-services companies hoping to meet the needs of consumers in India, one of the world's fastest-growing economies. Some of its lower-cost suburban areas are more popular with non-Indian outsourcing centers, says Vincent Lottefier, the country head in India for Jones Lang LaSalle, a real-estate-services firm.

Greater Mumbai, along India's west coast, is one of the world's most densely populated metropolitan areas, with about 12 million residents as of 2001, according to the Mumbai Metropolitan Region Development Authority. It struggles with poverty, congestion and such infrastructure challenges as poor drainage systems that sometimes lead to flooding in low-lying areas. At the same time, it is the nation's financial capital and home to India's film industry, known as Bollywood. "It's the Shanghai or New York of India," Mr. Lottefier says.

Mumbai's central business district submarket was the seventh priciest out of 176 markets in major cities world-wide, according to a survey released in November by CB Richard Ellis, a real-estate-services firm. The estimated cost to occupy prime space in Mumbai was $106.09 per square foot annually, just ahead of Paris in eighth place at $105.54. (London's West End was the most expensive, at $212.03.) Occupancy costs include rent, local taxes and service charges. Other Mumbai real estate sectors have seen hefty rent increases too. Mumbai's prime retail rents rose 25% in fourth quarter from the year earlier, according to Jones Lang LaSalle.

The soaring real-estate costs in Mumbai and elsewhere in India are worrisome to some economists. Ruth Stroppiana, director of Asia-Pacific economics at Moody's Economy.com, says the hot real-estate sector is fanning the country's current problems with inflation, which could damp the very investment needed to sustain India's recent run of impressive economic growth. India's gross domestic product rose about 8.8% in 2006 from 2005, just below China's 11% rate.

A number of factors have hampered new construction. Even in India's most cosmopolitan cities such as Mumbai, inadequate roads and infrastructure are issues for many projects. And unlike many other major world cities where developers vie for claims to the tallest building, government restrictions keep Mumbai's skyline modest and new buildings smaller.

More development is in the works. Unlike some other older city centers in India where it's hard to find a big enough piece of land to develop, Mumbai does have some pockets of property still available, says Katherine Farley, a senior managing director of Tishman Speyer Properties.

In 2005, Tishman Speyer announced a joint venture called TSI Ventures Ltd., with ICICI Venture Funds Management Co., a subsidiary of India's ICICI Bank Ltd. to develop real estate in India. The partners are proceeding with two large projects in the city of Hyderabad. Ms. Farley says TSI is getter closer to announcing transactions in several other Indian cities, including Mumbai, which she says is attractive because of its concentration of multinational companies.

Some in the real-estate industry are hopeful that the recent loosening of restrictions on foreign direct real-estate investments will increase development and stabilize prices. "Earlier investors were coming and trying to understand the market," says Anshuman Magazine, managing director in South Asia for CB Richard Ellis, a real-estate services firm. "Now the money is starting to pour in."

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