CorenetGlobal 2015 India Report (3) (1)

INDIA UPCOMING LOCATIONS1

U P C O M I N G L O C AT I O N S

C o r p o r a t e R e a l E s t a t e i n

By Sonali Tare

INDIA

PRIORITYRESEARCH

EXCLUSIVE

RESEARCH


There are however, many upcoming, smaller, Tier 2 and 3 cities that are increasingly gaining attention, and have the potential to draw investment from international as well as Indian companies.

Tier 1 cities such as Mumbai, Delhi and Bangalore have been going through exponential growth, and will continue to grow. However, as the pressure on these cities grows, so will the costs associated with

conducting business there. Similarly, the stress on infrastructure will continue to grow as well. With these changes, corporations, both Indian and multinational, will start to look for alternate locations to put their businesses, garnering increasing attention for smaller cities. Other factors such as lower cost of living, availability of cheaper talent, and more reasonably priced real estate might guide these decisions as well.

Mumbai, Delhi, Bengaluru (Bangalore), are cities that every CRE professional in the world has heard of and is aware of. Mumbai is the financial capital of India, Bangalore the silicon valley of India, and Delhi, including New Delhi (the capital of India), has one of the largest urban populations in the world.


1 Emerging Delivery Locations in India: The Rising Tide, Nasscom and Cushman & Wakefield, 20142 Growth of ATM industry in India, Prof. Jyotiranjan Hota, CSI Communications, February 20133 Indian ATM Industry: Gearing up for the next phase of growth, Paymentscardsandmobile.com

The definitions of Tier 1, 2, and 3 are varying, and depend on who you ask. For example, while most agree that Mumbai, Bangalore and Delhi are considered Tier 1, cities such as Pune, Hyderabad, Chennai and Kolkata are harder to categorize. As George McKay, South Asia Director | Office & Integrated, Colliers observed, It really depends on who is looking at these cities. E.g. Pune might not be considered to be a Tier 2 city by someone looking at it from the IT/BPO perspective. For them Pune is probably a Tier 1 city. This is borne out by a 2008 report by National Association of Software and Services Companies (Nasscom) and AT Kearney titled Location Roadmap For IT- BPO Growth: Assessment Of 50 Leading Cities. According to this report, Mumbai, Delhi, Bengaluru, Chennai, Hyderabad, Kolkata, and Pune were identified as the leaders when it comes to IT/BPO outsourcing.

From the IT/BPO point of view, India is still one of the number one destinations, according to AT Kearneys 2014 report titled, The Rising Stars in IT Outsourcing. The maturity of the Indian IT sector, including strong processes and a well-developed IT infrastructure, continue to make India an attractive location to do business. In addition, there is a plethora of English-speaking, IT talent that graduates every year, from Indias technical schools.

However, it is not only the IT/BPO sector that continues to grow. With a fast-growing, large population like Indias, many sectors are impacted by the expansion taking place. For example, India is also increasingly becoming a consumer powerhouse for financial/banking services. With a substantial portion of the 1.3 billion population still in the process of connecting to the formal banking and financial systems, there is huge potential in the market for these services. For example, the number of ATMs in India has risen exponentially, from over 16,000 in 2005, to an estimated 174,000 plus in 2015.2 According to industry reports, most of the increase is expected to come from the upsurge in ATM installations in Tier 2 and 3 cities.3 With the new government also promising to provide one bank account per household in India, this scheme is sure to have an impact on the banking sector, further accelerating growth. Currently, about 40 percent of Indians have little access to financial services.4

4 Indias Narendra Modi launches bank accounts for all, BBC.com, 28 August 20145 Banking sector in India, IBEF.org 6 Indian Banking Sector To Create 2 Million Jobs In The Next Decade: Experts, Trak.in,

February 10, 2014

As can be seen from the graphs above, there has already been a significant rise in the total amount of deposits in the country. Estimates put the Indian banking and financial sector in third place by 2025, in terms of volume as well as employment. In terms of employment, the expectation is that over the next decade, 2 million jobs will be created by this industry alone and that a lot of this growth will be targeted towards the Tier 2 and 3 cities.6

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7 Hitting the sweet spot - The growth of the middle class in emerging markets, Ernst & Young, 2013

8 Hitting the sweet spot - The growth of the middle class in emerging markets, Ernst & Young, 2013

9 Why should a retailer move to tier-II & -III cities, Indiaretailing.com, Manisha Bapna, September 17, 2014

10 Future of India The Winning Leap, PricewaterhouseCoopers, 2014

MIDDLE CLASS AND RETAIL

Impacting the Tier 2 and 3 cities, specifically, is the fact that about 100 million of this middle class will live in these cities, and consumption in these regions will grow from US$ 5.7 billion in 2014 to over US$ 80 billion by 2026.9

According to a recent PricewaterhouseCoopers report, retail in India is expected to grow to 1 trillion USD by 2020, from a level of 500 million USD in 2012. While much of the retail sector in India is still unorganized, according to the report, the organized sector will grow from 8 percent in 2012 to an estimated 50 percent in 2034.10 And as the sector organizes further, the pressure on retail-related real estate needs will increase. Additionally, with increasing incomes in the smaller cities, interest in luxury brands is on the rise. For

example, Mercedes Benz is looking to expand in the Tier 2 and 3 cities. The car company has new dealerships in smaller towns such as Madurai, Kanpur, Nashik, etc.11 Similarly, Sony, the consumer electronics company is expecting to expand its TV business to grow in the non-metro regions of the country. Furthermore, they are looking at expanding their offerings from just TV sets, and adding mobile handsets. They also anticipate their distribution network to rise from 20,000 to 24,600 in the coming year.12

This growth in retail and increased consumption is not limited to brick and mortar stores. According to eBay, which identifies India as one of its main growth markets, a substantial amount of the demand

Another factor that is sure to influence the way India and its economy grows is the growth in its middle class. By 2030, the Indian middle class is projected to reach 475 million, which will be one of the largest in the world, according to a report by E&Y.7

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11 Merc plans used car push in small cities, Economictimes.com, Aditi Saxena and Ketan Thakkar, 19 December, 2014

12 Sony looks to tap Indias small cities, affordable segment, Deccanchronicle.com, September 28, 2014

13 Tier II & III cities dominate eBay traffic, Financialexpress.com, January 20, 2015 14No more doubts about e-commerce survival, Livemint.com, Shrutika Verma and Mihir

Dalal, December 29, 2014


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15 Almost 25% of Indias total demand for warehousing space in 2014 driven by e-retail, CBRE.com, January 21, 2015

16 Rowing the New Wave Game-changing Rules for Indian Real Estate, JLL, 2014

in India comes from Tier 2 and 3 cities. Significantly, the demand for ecommerce in India is further encouraged by the easy availability and high level of penetration of cell phones, as well as the increasingly ubiquitous nature of internet connectivity.13 This increased demand is seen by Indian e-commerce companies such as Snapdeal as well. For example, Indian e-commerce sites are seeing over 60 percent of their demand come from Tier 2 and smaller cities.14 This increase in e-commerce is impacting real estate by increasing demand for warehouses. According to a recent report, in 2014 25 percent of the increase in demand in warehouses came from e-retailers. In an effort to cement their presence, e-retailers are also demanding more office space, and from 2013 to 2014 there was a 400 percent increase in office space demand from this sector.15

As these cities grow, and continue to urbanize further, demand for what might be considered more typically urban things has increased as well. For example, the smaller cities are becoming more and more lucrative from the perspective of fast food companies. Over the last two years, fast food consumption in Tier 2 and 3 cities has grown 108 percent, as opposed to 35 percent in Tier 1 cities, according to a report by The Associated Chambers of Commerce & Industry of India (Assocham). Furthermore, according to the report, there is tremendous potential for additional growth in the fast food industry in the smaller cities.

Another sector that is starting to be impacted is the hospitality sector. International chains like Marriott and Wyndham are already looking to expand in smaller locations. Additionally, Indian brands such as Sarovar Hotels and The Fern Hotels and resorts are similarly counting on Tier 2 and 3 cities to be growth areas.

As some of the sectors mentioned above continue to grow, their demand for real estate changes as well. The graph below illustrates these trends:

the demand forecommerce in India is further encouraged by the easy availability

and high level of penetration of cell phones, as well as the increasingly

ubiquitous nature of internet connectivity.


UPCOMING CITIES

17 Emerging Delivery Locations in India: The Rising Tide, Nasscom and Cushman & Wakefield, 2014

18 India Map with Capital, Major Cities, Roads and Water Features, Mapresources.com

All of these prospects will ultimately lead to increased interest in emerging cities in India. There was an uptick in interest in the smaller cities before the global financial crises in 2008. Everyone was looking to expand and upcoming locations made sense.

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After the crises, however, the general mood was to try and consolidate as much as possible. Some of the costs advantages that Tier 2 and 3 cities had were eroded due to corrections in income and real estate costs in the Tier 1 cities. The end result being that many corporates ended up staying in the bigger cities, according to Sanjay Dutt, Executive Managing Director- South Asia, Cushman & Wakefield. However, over the past few years, there have been a few cities that have garnered more interest than others.

A good marker of where and how business is trending is the IT and BPO sector, which according to a recent report by Cushman & Wakefield, is the biggest private sector employer in India. The same report identifies four cities as the most promising cities in terms of future growth: Ahmedabad, Jaipur, Kochi and Kolkata.17 Though these are identified as the best next-generation locations for the IT/BPO sector specifically, in terms of future office demand, this sector is a good identifier of upcoming trends.


20 KPMG Global Frontiers Online: Ahmedabad, India21 Ahmedabad records highest office uptake growth in Jan-Sept: C&W, Business-

standard.com, November 26, 2014

AhmedabadAhmedabad is located on the west coast of India, in the state of Gujarat. It is the largest city in the state and major industries include engineering, textiles, pharmaceuticals, etc.20 Ahmedabad, which has typically attracted small and medium size local/regional business is now being considered as a potential location by more and more large corporations. Access to the citys talent is one reason why companies are choosing to move here. For example, Ahmedabad is home to two of Indias premier institutes, the Indian Institute of Management, Ahmedabad and the Indian Institute of Technology, Gandhinagar. It also has a large talent pool of finance-related professionals, such as those in the accounting field.

The government has been seeking to make the city more appealing to business, overall, and the InfoCity in Gandhinagar, which lies about 30 kilometers away from Ahmedabad and is the capital of Gujarat, has added to that appeal. The InfoCity aims to have world class infrastructure, residential, and recreational facilities. The goal is to be the prime location for the IT/ITes and BPO sectors. Ahmedabads proximity to the InfoCity will draw further attention to the city. There are already indications that businesses are taking a closer look at Ahmedabad. This is borne out by the fact that in the first three quarters of 2014, the city saw a 200 percent plus increase in the absorption of office space, as compared to 2013. Most of the increase in this demand came from IT/ITes and manufacturing.

IT companies such as TCS, Patni and Aegis are already located in the city and there has been an uptick of interest from auto manufacturers. Tata Motors, Ford Motors, Honda, General Motors, and Maruti Suzuki, all, either already have plants in Gujarat, or plan to open plants there in the near future. The fact that all of these will be in Ahmedabad district will ensure continued interest and growth in the city itself.

JaipurThe city of Jaipur, also known as the pink city due to its uniquely colored architecture, is the capital of the north-western state of Rajasthan. In addition to being the capital city of the state, it is also a very attractive tourist destination, with tourists from all over the world flocking there. The main industries in Jaipur, apart from tourism, are mostly related to handicrafts, such as jewelry, and stone and metal works. More recently, it has been attracting increasing attention from corporates, especially in the IT and BPO sectors.

Improvements to infrastructure, such as the building of a metro system, and a new IT park, Mahindra World City are having a positive effect on the attractiveness of Jaipur as a business location. The Mahindra World City is one of the largest IT parks in the country. It was specifically built with IT companies in mind, and has Grade A office stock on offer.

Furthermore, Jaipur has a good talent base, with numerous universities in the city, as well as the premier Indian Institute of Technology, a few hours away, in Jodhpur. In addition to the presence of IT companies such as Wipro, Infosys and Genpact, there are indications that Jaipur is becoming a hub for finance and banking-related BPO operations.22 Deutsche Bank as well as Indian banks ICICI and State Bank of India have facilities in the Mahindra World City.23 In a sign that there is increased recognition of the citys potential, Oracle recently announced that they would be opening offices in Jaipur, as part of a 5 city expansion plan in India, aimed at Tier 2 and 3 cities.24

Other sectors showing interest in the city include the manufacturing sector, with the JCB group, the largest manufacturer of construction equipment in India announcing new facilities near Jaipur.25

Jaipurs proximity to the Delhi-NCR region, and the development of the Mumbai-Delhi Industrial Corridor on which Jaipur falls, will ensure that the city will continue to attract increasing attention.

IT, auto manufacturing, finance and banking are all contributing to the growth of these cities.


22 KPMG Global Frontiers Online: Jaipur, India23 Mahindra World City Online: Jaipur24 Oracle to set up five more offices in India, Thehindubusinessline.com, Rajesh Kurup,

January 3, 2015 25 JCB inaugurates new plants in Jaipur, projectsmonitor.com, November 25, 2015 26

Export revenue grows 23% in Kochi Infopark firms, Thehindubusinessline.com, V Sajeev Kumar, May 6, 2013

KochiKochi or Cochin is situated in the Kerala state of India, which lies on the south-west side of the country. Kochi, which is the commercial capital of the state, has a vibrant commercial port, and is also a popular tourist destination. Major industries include, shipbuilding, spice exports, health services, IT, and tourism, amongst others. With a large talent pool and high literacy rates, Kochi is emerging as a lucrative destination for IT and BPO activity. Recognizing the potential of the IT/BPO industry to create growth and employment in the region, the state government of Kerala initiated in 2004 the construction of an InfoPark. The InfoPark already employs over 18,000 people and houses over 130 firms. More recently, it has been garnering increased attention, with Tata Consultancy Services (TCS), the India-based IT giant, as well as Cognizant planning to add 1.5 millilon square feet and 12,000 jobs each to the InfoPark by 2016.26

There is also a Smart City in the works, a 246-acre facility, which, it is estimated, will employ 90,000 people. The city is to be completed by 2020 and opportunities will include retail, schools, hospitals, food & beverage, hospitals, etc.27 The first phase, including an IT center will be completed by mid-2015, and there is already a plan in place to locate IT firms there.28 The city is also improving its infrastructure by building a new international terminal, capable of handling over

10 million passengers annually.29 There is also a metro rail in the works, with the project to be completed by 2016.30 It is anticipated that the metro will reduce traffic congestion, improve connectivity and keep up with transportation demands that will be put on the citys infrastructure, as it grows.31

27 Keralas 90,000 job IT Smart City will create 4500 jobs in 2015, Indiatoday.in, J Binduraj, May 31, 2014

28 SmartCity targets June 15 deadline, TimesofIndia.com, December 14, 201429 India 2014: Enabling the prospects, EY 2014 30 Alstom to deliver signalling and electrification solutions for Indias Kochi Metro Rail,

Railway-technology.com, 23 January 2015 31 Why Kochi Metro, Kochi Metro Rail Limited

KolkataKolkata (formerly Calcutta), is the capital of the eastern state of West Bengal and the major commercial and urban center for most of eastern India. It also houses one of Indias major ports. Being the capital of the state, Kolkata has always been on the business radar and is not necessarily a new upcoming city. It was mentioned in the 2008 Nasscom and AT Kearney report as being one of the leaders of the IT/BPO scene, however the city has gone through many ups and downs since, and is now undergoing a revival with the government keen on welcoming further business.

Due to its location and due to its being the major hub for business in the region, Kolkata attracts a lot of talent. Some of Indias biggest universities, such as the well-renowned Indian Institute of Management are located there. According to KPMG, the presence of the Indian Statistical Institute also allows Kolkata to deliver a high level of finance-related services. Adding to its weight as an attractive business destination is the presence of the Kolkata Stock Exchange, which is


the second largest in the country.32 Being the state capital adds to its appeal. In addition to national and state chambers of commerce being located there, many manufacturing firms locate their headquarters in Kolkata as well.

In 2012, the state government put into place a Technology Policy, with the aim of becoming one of the top three states in the country in terms of employment and turnover in the Information Technology and electronics design and manufacturing fields. The policy plans to make it easier for investors to invest, increase the talent pool related to these fields, and enhance IT connectivity and training in the rural areas.33 All of these steps will make Kolkata, as the business nerve center, more attractive. Already, many top IT/BPO companies such as, Accenture, Infosys, IBM, Wipro and TCS, amongst others, have a presence there.34 According to a recent report by Cushman and Wakefield, Grade A IT office space increased by 1.6% between 2008 and 2013.35

Connectivity to IT technology is good, with the state government keen on improving this further, as outlined in its 2012 Technology Policy. In order to meet the policy goals, the government recently announced that Kolkata will have free, city-wide wi-fi in the coming two months.36

In 2013, the city inaugurated its new airport facilities, with the capacity to handle 25 million travelers, as compared to the earlier 4.5 million.37 Kolkata also has one of the oldest metro railway systems in the country, and there have been plans to expand it for some time. However, these plans have been currently put on hold. With traffic congestion in the city being quite challenging, the improved metro connectivity would have alleviated transit times to some degree. On the other hand, Kolkata, has good transportation to other parts of the country, as well as the rest of the state.38

32 City Spotlight: Kolkata, India Briefing, Business Intelligence from Dezan Shira & Associates

33 West Bengal Policy on Information and Communication Technology, 2012 and West Bengal ICT Incentive Scheme, 2012, Software Technology Parks of India, Kolkata

34 KPMG Global Frontiers Online: Kolkata, India 35 Emerging Delivery Locations in India: The Rising Tide, Nasscom and Cushman &

Wakefield, 201436 Kolkata to become fully wi-fi-enabled in 2 months time, economictimes.com, January

27, 201537 Kolkata airports new terminal inaugurated, Business-Standard.com, January 21, 201338 KPMG Global Frontiers Online: Kolkata, India


39 India 2014: Enabling the prospects, EY 2014

THE IMPETUS AND THE CHALLENGES

However, not all companies, especially international MNCs, will locate to a small place if its their first venture into India. For most companies that are new to the country, the big metros, the first Tier cities are where they will look to enter into the market from. However, if the company has been in the country for a number of years, they are more aware of the market, they are aware of the risks, and if they are looking to expand, they will consider the smaller cities, says McKay. Overall, there needs to be further awareness created about non-metro cities, geared especially towards the MNCs. The lack of knowledge about upcoming destinations is evident in the recent Ernst & Young India 2014 Attractiveness Survey, according to which, 43 percent of respondents were only aware of major cities in India, and were unable to name any upcoming locations.

Indian MNCs, as well as companies looking to expand their manufacturing facilities specifically, do however, find smaller cities to be more attractive. For Indian companies, there is the higher level of awareness of how things work on the ground, and they are therefore more open to this kind of move. For manufacturing focused companies, the availability of larger lot sizes hold appeal, especially since these are either not available in Tier 1 cities or come at a very high premium, concludes Joseph Reddy, General Manager, Hiranandani Constructions Group.

It also bodes well for the smaller cities in general, that infrastructure and related activities are expected to see a boom. The new government which came to power in 2014 has put a premium on enhancing infrastructure and on the creation of smart cities. There are also plans in place to create highway corridors between major cities such as Mumbai and Delhi. These corridors will influence the cities that lie on this corridor, increasing access to them. Any cities on the path of these enhanced highways are sure to experience growth.

And while infrastructure can still be an issue, many times, the governments in non-metro cities are willing to work closely with the companies, whether Indian or MNC, to give them what they might need

For any firm, location considerations are an ongoing theme. Whether they are looking to expand their footprint, looking to cut costs or looking for more talent. With that in mind, smaller locations are always going to be in the running.

to make the decision to locate there. Additionally, when comparing the infrastructure scenario between small and large cities, many times one finds that though some of the metros have good infrastructure, many dont. If you were to look at it solely from the point of view of cost, utilities such as power and water are not huge cost generators, when compared to the overall cost of real estate. So, if the cost of real estate is especially low in a Tier 2 or 3 city, as compared to a bigger city, and the only drawback is lack of water and/or electricity, that lack is not necessarily a deterrent, according to Shirish Tare, Head Projects, Urban Infra. He adds, almost every office building in India already has a 100% backup generator and a water re-cycling system, and the costs associated with that arent that high. They are a small percentage of the total real estate cost. Overall, however, there is reason to be hopeful that infrastructure will improve with the various initiatives already in place.

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In addition to improved infrastructure there is also a need for improved quality of office space. Though real estate costs might be lower in upcoming cities, many times, the quality of what you get is not up to par. Smaller locations might not always garner the same kind of attention that big cities do from the big developers. With that being the case, there are many times when corporations might have to rely on smaller developers instead. The end result being that the actual building might not meet the expectations. The quality of construction to meet the demand of a Class A grade building might be not available and can lead to the need for more build-to-suit kinds of situations. These issues could be mitigated by big developers venturing into these cities looking for opportunities, concludes Reddy.

However, there is hope that things are changing. With the advance of Special Economic Zones, as well as Software Technology Parks of India, there has been an addition to the availability of quality office space even in smaller locations. So much so that in the last five years, some of the emerging locations have seen an increase of over 10 times in their Grade A stock.40

In terms of talent, much of Indias talent comes from the smaller cities, for example, 50-52 percent of the IT/BPO talent in India comes from Tier 2 and 3 cities.41 According to Dutt, The bigger companies are fairly aware of where the best talent comes from. They have that pipeline in place. And yes, the costs associated with talent in the upcoming cities are cheaper. However, on the flip side, those right out of college are looking to move to the big city. They want to experience that. With that being the case, with the talent being willing to move, the imperative to locate where the talent is, is not always there. However, the impetus to get higher access the talent pipeline was being felt a few

years back when salary increments were rising very quickly. The rise in income related costs was eroding the cost advantages associated with doing business in India. Now, those increments are in check, but as the economy continues to pick up, those costs will begin to rise again, and the need to start looking at Tier 2 and 3 cities from that perspective will increase, Dutt adds.

However, there will be some time before the challenges of locating higher level executives to smaller cities are overcome. With the standard of living and amenities not always of the highest levels, it can be difficult to convince leaders to move there. The end result being that either more strategic facilities are kept in the metros or there is increased travel to and fro. There is hope, nevertheless, that as the emerging cities grow, improve infrastructure, and attract further retail, that this will change.

ConclusionOverall, the prognosis for upcoming cities in India is good. There are many opportunities for them to grow as we see from the report above. However, there are also many challenges, from lack of quality offices to the lack of adequate infrastructure. Additionally, emerging locations have to contend with what might be considered as micro-markets around Tier 1 cities, such as Navi-Mumbai, which is a suburb of Mumbai. These locations are many times cheaper than the CBD in the city itself, and have the advantage of being in close proximity to the city center, the big airports, as well as being able to support a higher standard of living. This means that Tier 2 and 3 cities looking to grow are not only competing with each other to attract business, but also with the suburbs of the bigger cities.

Special thanks to the following leaders for sharing their perspectives:

George McKay Colliers Sanjay Dutt Cushman & Wakefield Joseph Reddy Hiranandani

Constructions Group Shirish Tare Urban Infra



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CorenetGlobal 2015 India Report (3) (1)

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