In a city with few office-campuses, Mumbai SEZs Offices find favour with Occupiers
Mumbai witnessed an unprecedented rise in leasing done in SEZ-designated (Special Economic Zone) buildings with 1.50 MSF of lease transactions recorded in these buildings in 2024. This is a ~80% rise over 2023 and also more than the highest leasing volume transacted previously in SEZ spaces of 1.3 MSF for the full year 2019.
SEZ designated buildings were highly preferred by occupiers in the IT & allied sectors as it offered tax incentives and other concessions under the erstwhile SEZ Act, 2005 of the central government. However, post the sunset clause on SEZ beginning April-2020, many office occupiers felt that operating from such buildings was not attractive anymore. On the contrary, it was difficult to consolidate multiple operations/business verticals within a firm in a SEZ building, owing to stringent compliance requirements. Therefore, despite many SEZ-designated buildings being situated in commercially attractive micro-markets such as Central Mumbai and Thane-Belapur Road, these buildings higher vacancies compared to the Non-SEZ buildings. In Mumbai overall grade-A office building vacancy stood at ~18% as of end-2023, while in SEZ buildings the same stood at over 22%.
The potential that buildings in SEZ held was unlocked when the government announced partial denotification of SEZ buildings through a gazette notice circulated in December 2023. This modification gave landlords of SEZ buildings an option to designate up to 50% of the total built-up area as non-SEZ space, or Domestic Tariff Area (DTAs).
Major tenant categories that dominated leasing in Mumbai’s SEZ spaces during 2024 includes IT-BPM with about 29% share, BFSI (~28%), Healthcare & Pharma (~14%) and Engineering & Manufacturing (~13%). BFSI accounted for the massive jump of ~28x in the BFSI leasing while Professional services firms seen a ~7X jump in SEZ leasing done by professional services firms in 2024 on a y-o-y basis. A part of the leasing was also done by tenants classified as Global Capability Center (GCC) of multinational corporations, thereby rendering such spaces attractive to a variety of tenants. As of exit 2024, average vacancy rate observed in the overall office market in Mumbai Metropolitan Region (MMR) stood at ~ 15%, whereas SEZ buildings’ vacancy was around 13% during the same time.
In the MMR region, Powai in Central Mumbai and Thane-Belapur Road are the two micro-markets with dominant supply of SEZ buildings. Both these micro-markets witnessed a sharp fall in vacancy rate in SEZ buildings. Powai saw SEZ vacancy rate fall to a mere 8.6% as of Q4 2024 from as high of 12% a year ago. On the other hand, Thane-Belapur Road also witnessed a 10% point fall in SEZ vaccancy to ~14%, with an outlook that this could further fall in coming quarters.
Once an area is officially changed from Special Economic Zone (SEZ) to a non-SEZ zone, businesses in that zone can no longer access indirect tax benefits or concessions that were available to SEZ units. These included exemption from GST, input tax credit, service tax exemption, duty free import of raw materials and income tax exemption.
In Mumbai, SEZ buildings offer a unique proposition of been gated communities, providing controlled and secure working environment for corporations and employees. While in other large IT-dominated cities these could be a widely available features, within MMR they remain exclusive and unique to a select few campuses.
At an India level too, office transactions in SEZ buildings grew by 49% on an annualized basis in 2024 with close to 17 MSF of transactions recorded across top-8 cities. Cities such as Bengaluru, Chennai, NCR and Hyderabad also recorded healthy leasing volumes in SEZ spaces during the year.
Multinational corporations (MNCs), particularly those based in the US, prefer SEZs for their strategic advantages. These campuses offer efficient infrastructure and stringent security norms, making such buildings ideal for conducting their operations.
Finally, with partial denotification that the government allowed, increased the appeal of SEZs as they now offer operational flexibility along with reduced compliance burdens for occupiers. This is another testament of improving ‘Ease of Doing Business’ in India.
