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In a city that not too long ago lost its head over auctions of mill land, the auction of prime land in Mumbai’s Bandra Kurla Complex on March 19 this year must have seemed like a death chill. On offer was 25,560 sq. mt of land for both commercial and residential purposes. But guess what happened? There was only one bidder, Jet Airways, for the commercial plot measuring 5,952 sq. mt., and the bid price of Rs 3.4 lakh per sq. mt. wasn’t too much more than the floor price of Rs 3 lakh per sq. mt. Two residential plots totalling 7,000 sq. mt. were bought by Star Light, a joint venture between the Ajay Piramal Group and Suntech Realty.

But what stunned realty watchers was that there were no takers for another 12,000 sq. mt. of prime land that was also on offer.

The problem: the high reserve price. Finally, it seems, real estate prices in the city are beginning to outstrip the appetite of buyers. “There is definitely a concern as far as the prices in Mumbai’s suburbs are concerned.While the demand is for apartments in the Rs 50-55 lakh range, the asking price from developers is between Rs 80 lakh and Rs 2 crore,” says Anuj Puri, Chairman & Country Head, Jones Lang LaSalle Meghraj. “Eventually, sales will dip on account of this,” he adds. Goldman Sachs raises a similar concern in a recent report on India that says affordability is stretched. “It will be difficult for end-users to buy at current prices in suburban Mumbai,” it says.

Key trends Residential prices are still moving up. There is a yawning gap between what most consumers can pay and what developers are asking for. There is a slowdown in some pockets in suburbs such as Andheri and Ghatkopar. While prices haven't fallen, sales volumes are slowing down. Demand for office space has slowed down. A recent auction of plots at Bandra Kurla Complex drew few bidders and two plots remained unsold. Though fresh retail space got added in 2007, affordability remains a key issue. Retailers say that it will be difficult to make decent margins at current rentals.

For their part, builders argue that land is in short supply in Mumbai compared to other Indian cities. “Mumbai is small since it occupies just 434 sq. km, while the corresponding figure for the National Capital Region is 2,000 sq. km,” points out Dharmesh Jain, Chairman & MD, Nirmal Group of Companies. Just the same, developers may be forced to come up with more affordable housing, simply because that’s where the market is. “The demand for housing in the Rs 20-50 lakh range is looking strong,” says Indiabulls Financial Services’ CEO, Gagan Banga.

On commercial space, Banga says that prices are unlikely to soften since there is a lot of pent-up demand for high quality office space. Besides, “Mumbai is still the preferred destination (for businesses),” says Banga. Three years ago, Indiabulls acquired close to 22 acres of mill land for Rs 720 crore. Referring to that, he says that the projections have been in line with the company’s expectations. “We have managed to get rents of more than Rs 300 per sq. ft,” he says.

It is hard to say how long Mumbai can afford to remain this expensive and the suburbs are already seeing a softening in rentals. In the days ahead, Mumbai’s real estate story, at least for commercial property, will depend on the emergence of alternative destinations.

How long that takes is, of course, anyone’s guess.