Jul 1997

INDIA: Bombay's real estate mess

Salil Tripathi

Bombay: The Financial Capital That Isn't
With sky-high property costs, poor infrastructure and organized crime muscling in, investors discount Bombay's lauded business edge

The chain of stop lights along Bombay’s Marine Drive, called the Queen’s Necklace, shimmers at night. At one end is the posh Malabar Hill, home to the city’s elite. At the other end is Nariman Point financial district, where office towers jut skyward.

The square-mile headland is home to the world’s priciest commercial property, with rents as high as $125 per square meter per month. Realtors’ nirvana? A multinationals’ mecca?

Hardly. Bombay’s shambles of a commercial-property sector is the shameful outcome of the city’s failure to live up to its claim to be the financial and corporate nerve center of India.

There hasn’t been a new Grade A office development in nearly five years. Most buildings lack modern climate, security and safety control systems. But it’s not all bad: The fact that none of the buildings rise above 35 floors is a godsend given that their elevators are cramped and frequently break down.

There have been at least four major blazes in landmark complexes in the past decade. A handful of bus routes serves a district with more than 100,000 office workers, a small dusty lot passes for a car park and there are only three decent restaurants.

Its excesses are not restricted to rip-off rents - penetration into the real-estate sector by organized crime has reached epidemic proportions, fomented by economic upheaval and leftist regulators.

Dubbed Slumbay after its infamous shanty sprawl, this city of 13 million has severely restrictive property laws that hinder urban renewal, limiting supply and keeping prices high. This has created a breeding ground for corruption and intimidation. Disputes between conflicting land interests frequently end in gunfire, with 10 deaths in the last two years linked to controversial development deals.

Add in restrictions on foreign investors and financial-sector participation, and it’s easy to see why many companies no longer make Bombay the automatic choice.

For Bombay-based multinationals like Ford Credit India, headaches range from the chronic shortage of expatriate-standard housing to trying to comply with U.S. anti-corruption practices in Bombay’s murky market. American law requires even the overseas arms of U.S. multinationals to adhere to a strict code of business ethics forbidding gratuities, backhanders and untraceable money transactions. Says Managing Director Ian Gosling: “Negotiating terms in Bombay is a problem. There are no norms and there is a sense of difficulty in concluding deals.”

Leading Indian and foreign companies like Reliance Industries Ltd., Essar Group, Mafatlal Industries Ltd., Citicorp, Pfizer Ltd., Arthur Andersen & Co. and McKinsey & Co., as well as the British Deputy High Commission, have located their offices in Nariman Point - once estimated to account for 40 percent of India’s corporate wealth.

But these days many more opt for other, cheaper cities. Bangalore’s 75 percent-lower rents are a magnet for high-tech companies like Intel, Hewlett-Packard, Motorola and VeriFone. New Delhi won over Coca-Cola and PepsiCo and smaller Indian cities like Hyderabad and Pune offer cost-effective alternatives.

Nandan Nilekani, deputy managing director of a leading Indian software defector to Bangalore, has no regrets: “Who wants to hang by the straps for four hours a day in a packed Bombay railway compartment?”

Long commutes on Bombay’s crowded suburban trains to work in substandard offices are the product of ill-fated efforts to legislate wealth redistribution. The federal Urban Land Ceiling Act, designed to prevent concentration of land in too few hands, effectively blocks new residential or office projects. Maharashtra state’s Rent Control Act caps rents at uneconomic levels, killing the incentive for property owners to refurbish older buildings. And rising land prices encourage owners to sit on prime land rather than redevelop it.

In this environment, slum-lords and criminals play an increasingly powerful role in price fixing of large transactions.

“Real estate has not opened up like the rest of the economy,” says Aashish Velkar, general manager at international property-management consultants Colliers Jardine. “Investment in real-estate development by banks and financial institutions is prohibited.”

Multinationals, however, can’t afford to wait. When the Korean conglomerate Daewoo was choosing headquarters for its Indian car project two and a half years ago, its first pick was Bombay. But eventually it chose half-priced New Delhi because it offered proximity to its plant as well as value for money. Explains Daewoo official Suvendu Amitabh: “You can’t put half your expected turnover into real estate.”

K.S. Narahari, spokesman for IBM’s Indian subsidiary, Tata Information Services Ltd., says: “Quality for multinationals is not just the quality of the apartment or commercial block. It’s the entire package. The fact Bombay cannot offer reasonably priced housing for executives within a convenient driving distance puts people off.”

Rules covering inward investment in real estate don’t help either. Foreign investors must form joint ventures with Indian partners with the outsiders’ share restricted to a maximum of 40 percent. Full foreign ownership is permitted only if the government deems the proposed project “infrastructure.”

For Hong Kong-based Pacific Century Group, with joint-venture commercial and residential projects under way in Bombay, it’s a calculated risk. “We’re aware of the problems,” says Executive Vice President Arnie Tucker. “But in the end it comes down to whether you believe you can make a reasonable return on investment. We believe we can.”

Bombay still bills itself as a commercial center with a centuries-old tradition of international commerce, good communications and a can-do culture. Prakash Hebalkar, a consultant who advises companies planning their India strategies, claims: “Bombay works. It is more efficient than any other city in India.”

Like everything else, real estate has been hurt by civil unrest, growing awareness of Bombay’s restrictive laws and investor fears spurred by Maharashtra’s government annulling and then renegotiating a $2.1 billion Enron Corp. power project. Vinod Rohira, head of sales at K. Raheja, one of India’s largest real-estate development companies, says: “Average prices are down by 25-30 percent but everybody who wants to buy is waiting for prices to come down further and everyone who wants to sell is waiting for the boom to start again.”

Multinational tenants complain of cash under-the-table demands by tax-dodging landlords, and property-law ambiguities make even straightforward transactions problematic. Says a spokesman for another automobile joint venture: “There were options we explored in Bombay, but we realized that legitimacy of property deals could be an issue. Sometimes properties are owned by people who are fronts. We decided to shift to Madras, where there are fewer bureaucratic headaches and dealings with shady figures.”

Hit men have left three textile-mill owners, five developers and a union leader dead. A 1980s strike killed the city’s textile industry, but pro-worker legislation prevented mill owners from formally closing their plants and divesting their assets. Unions blocked all deals, demanding that workers who lost their jobs be compensated first. The conflict turned deadly when owners illicitly sold land behind the back of the unions.

The Rent Control Act stops owners from raising rents, and there has been at least one suspicious death of a rent-controlled tenant who refused to vacate. Sanjay Pande, deputy police commissioner for economic crimes, explains: “Real-estate finance is controlled by the mob. Every builder, big or small, has to pay protection money.”

Some companies, including Reliance, Citicorp and Lintas, have moved their back-offices or executive-housing projects to midtown and uptown locations. But India’s corporate-sector response so far has been lame, with ambitious plans for quality projects designed by international architects as solid as sandcastles.

The state government’s new international airport is still a pipe dream and the $5.6 billion Bandra-Kurla financial center scheme, promising a large convention center, office towers and a diamond bourse, has only recently got off the ground. And four years on from a high-profile recovery blueprint slated to revive Bombay as a services capital and develop leather-processing, diamond-processing and ship-breaking sectors, the plan is no closer to materializing.