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Why Companies Setting Up in India Should Skip The Metro Cities

27/05/2016 3:23 PM IST | Updated 15/07/2016 8:27 AM IST
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India has emerged as an attractive destination for multinationals. Any company looking for growth and expansion of their business cannot afford to ignore this country, but the infrastructural challenges of setting up shop in a developing economy can be daunting. In such a scenario, effective corporate real estate management -- providing corporations with a productive environment to house employees, manufacture and distribute products and provide services to the market -- becomes critical in ensuring the success of any company's strategy in India.

Corporate real estate decisions in India come with their own set of complications. The major cities and business centres are already groaning under the pressure of more people than they can truly handle; the overall standard of living in these cities is dropping. As initiatives such as Modi's Smart Cities campaign to develop Tier 2 and 3 cities take off, more companies are looking to invest in non-metro cities. Oracle, for instance, announced they would be opening offices in Jaipur, as part of a five-city expansion plan in India, aimed at Tier 2 and 3 cities. Taking such developments into consideration, corporate real estate decision-makers need to deliberate on how to expand their business to seemingly off-beat locations by identifying the right cities to invest in and when.

Several Tier 2 and 3 cities in the country are showing promise of growth, with some garnering more interest than others due to their relative infrastructural robustness.

Identifying growth cities

Several Tier 2 and 3 cities in the country are showing promise of growth, with some garnering more interest than others due to their relative infrastructural robustness. A recent CoreNet Global report titled "Corporate Real Estate in India: Upcoming Locations" identified the following cities as potential growth centres:

Ahmedabad: Has a high availability of talent, especially from premier institutes such as IIT and IIM. In addition to this, plans to set up the Gujarat InfoCity and Gujarat International Finance Tec-City (GIFT) show promise to drive growth.

Jaipur: Expected to see growth as a result of improvements to infrastructure and the setting up of one of the largest IT parks in the country -- Mahindra World City. Jaipur is also becoming an important hub for finance, manufacturing and banking-related BPO operations.

Kochi: Emerging as a lucrative destination for IT and BPO activity as a result of infrastructural developments and the construction of InfoPark, an IT hub. In addition to this, the state plans to develop a smart city -- a 246-acre facility that will employ 90,000 people.

Infrastructure development

The present government is placing increased emphasis on enhancing infrastructure. The proposed Delhi-Mumbai Industrial corridor, touted to be the world's largest infrastructure project, has the potential to urbanize 12% of India over the next 30 years. This will include a dedicated freight train corridor and will support the growth and set-up of manufacturing hubs through the length and breadth of the project. This, according to the CoreNet Global report will benefit the manufacturing sector considerably. In addition to improved connectivity, companies in the sector will have access to smaller cities to set up plants which require larger lot sizes.

The proposed Delhi-Mumbai Industrial corridor, touted to be the world's largest infrastructure project, has the potential to urbanize 12% of India over the next 30 years.

While existing infrastructure can pose a problem, often governments in non-metro cities are open to the idea of working with companies to develop the facilities that will help in setting up the company. Let's not forget that metro cities also often lack adequate infrastructure and facilities. For instance, most companies in metros have 100% back-up generators and water recycling systems to fill infrastructural gaps. So, if the cost of real estate is especially low in a particular city, it makes sense for a company to set-up its operations there.

Quality of office spaces and availability of talent

Another cause of concern for companies looking to invest in alternate locations is the quality of office spaces. Since smaller cities often do not garner the same interest from big developers, the quality of construction may not be able to meet the demands of a multinational company. However this is changing with the setting up of Special Economic Zones and software technology parks in the country.

Talent can be another area of concern. While it is estimated that 50-52 % of the IT/BPO talent in India comes from Tier 2 and 3 cities, this accomplished workforce tends to move to bigger cities for better opportunities and amenities. Additionally, many senior executives are unwilling to relocate to smaller cities for similar reasons. Basic infrastructure development facilitated by partnerships of the private sector with government can help curb this.

Well managed corporate real estate can play an important role in contributing towards the strength and competitiveness of a company.

Investment in corporate real estate can serve as an asset for a company based on the return on investment that it provides. Care should be taken to invest in real estate that is in alignment with the company's objectives. Well managed corporate real estate can play an important role in contributing towards the strength and competitiveness of a company. While there may be initial hurdles, there will be long-term benefits too.

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