After a decade of growth, realignment, consolidation and expansion in the office sector, there are two themes that are likely to influence occupier choices in the near future. The first of these is the move from established metropolitan cities to smaller locations across India and the second is the emergence of a new format of Special Economic Zones (SEZ).
Tier II cities like Kolkata, Pune and Chandigarh saw rapid growth in new supply of IT space, as these centres took notice of the inevitable shift to new locations and positioned themselves as emerging hubs through proactive policies and development of IT park type facilites.
Looking ahead there are a few clear pointers of the anticipated theme for the office market. First, projections regarding the office property sector suggest that it is poised for yet more significant growth. According to studies by Nasscom-Mckinsey it is estimated that between 2005-2010, around one million additional people would be employed by the IT & ITES sector. This increase in the number of new people joining the sector is anticipated to further fuel a demand for nearly 100 million sqft of office space. This would manifest itself not only in increasing volume and depth of the sector in existing locations but also spread to emerging markets in smaller cities and towns (classified as Tier II and III) as occupiers would expand into these to tap into virgin workforce pools. Second, the Special Economic Zones (SEZs) drive that is presently underway is expected to add a new dimension to the office property markets by offering delineated duty free enclaves with global standard infrastructure.
A research report titled Changing Dimensions: Emerging Themes in Indian Office Real Estate Markets brought out by Trammell Crow Meghraj, Knowledge Centre elaborates on the transformation of the office property market where the availability of talent will be the driving force determining where offices will be set up in future.
The report says, companies have started spreading geographically beyond established metropolitan cieis to what have been designated as Tier II and III cities. Tier I are established metropolitan cities, Tier II- upcoming cities, and tier III including state capitals and district towns which are emerging as new IT and ITES destinations.
Although Tier I cities have an established brand name and a large talent pool they have to contend with increasing costs. They also are seeing increasingly rising employee turnover. Tier II cities have established themselves as destination for IT and ITES companies and include locations like Pune, Chandigarh and Kolkata. These cities are also now squarely on the radar of IT and ITES occupiers. Tier III cities include state capitals in most cases and in some cases nodal cities, which are emerging as the new destination for IT and ITES occupiers like Kochi, Bhubaneswar, Thiruvananthapuram, Coimbatore, Indore, Ahmedabad, Jaipur, Nagpur and Nashik.
FACTORS COMPELLING CHANGE
The hunger to have the best talent, in order to stay ahead of the rest, is a fact of life for occupiers. As the cost of recruiting and retaining human capital headed north in established hubs, it has compelled occupiers to look for new talent pools. This is not to say there is no attrition in new locations, but the rate of attrition is relatively lower compared to more mature markets. According to a study done by Mafoi (Talent Pool Mapping Study: 2006), on an average, the attrition rates in more established locations like Delhi, NCR, Bangalore and Mumbai ranges between 25-40 per cent. Comparitively the attrition rate in Tier II cities like Pune and Chandigarh is a little lower at between 10-25 per cent.
The high turnover rates is one part of the story, rising salaries is another. The difference in salaries between locations is one of the reasons for companies to look at new locations, in a bid to reduce their costs. The difference in salary at the entry level between a Tier I location and a Tier II location is approximately 19-22 per cent while in case of a Tier I and Tier III location, the difference increases up to 42-57 per cent.
The report further says, while it is good to say that Tier II and III cities hold the future for the IT & ITES industry, these new locations are not without their own issues. Occupiers looking at expanding to such new locations should carefully evaluate the fitment of such cities with their business strategy.
Human Capital is by far the most important factor while deciding on a new location. Availability of good infrastructure is paramount to the success of operations for occupiers in new locations. One key parameter that needs to be evaluated is connectivity of such new locations with established metropolitan cities, as in many cases bad connectivity could lead to several problems.
Low cost of real estate is just one part of the story. Occupiers need to secure good quality office real estate at appropriate costings in new locations. Although large national level developers have started to move into Tier II and III locations, there may be cases where ready availability of Grade A space may be limited in the short terms. In addition it is important to consider the softer issues about a location which may be equally important for attracting and retaining employees. These could include issues such as quality of life, general city environment, availability of entertainment.
The SEZ is still a recent phenomenon, the SEZ policy and issues are anticipated to evolve over a period of time and this will mean changing dynamics and hence occupiers need to be constantly aware of such changes and have an element of flexibility in their strategy to adapt to these changes.
Tier II cities like Kolkata, Pune and Chandigarh saw rapid growth in new supply of IT space, as these centres took notice of the inevitable shift to new locations and positioned themselves as emerging hubs through proactive policies and development of IT park type facilites.
Looking ahead there are a few clear pointers of the anticipated theme for the office market. First, projections regarding the office property sector suggest that it is poised for yet more significant growth. According to studies by Nasscom-Mckinsey it is estimated that between 2005-2010, around one million additional people would be employed by the IT & ITES sector. This increase in the number of new people joining the sector is anticipated to further fuel a demand for nearly 100 million sqft of office space. This would manifest itself not only in increasing volume and depth of the sector in existing locations but also spread to emerging markets in smaller cities and towns (classified as Tier II and III) as occupiers would expand into these to tap into virgin workforce pools. Second, the Special Economic Zones (SEZs) drive that is presently underway is expected to add a new dimension to the office property markets by offering delineated duty free enclaves with global standard infrastructure.
A research report titled Changing Dimensions: Emerging Themes in Indian Office Real Estate Markets brought out by Trammell Crow Meghraj, Knowledge Centre elaborates on the transformation of the office property market where the availability of talent will be the driving force determining where offices will be set up in future.
The report says, companies have started spreading geographically beyond established metropolitan cieis to what have been designated as Tier II and III cities. Tier I are established metropolitan cities, Tier II- upcoming cities, and tier III including state capitals and district towns which are emerging as new IT and ITES destinations.
Although Tier I cities have an established brand name and a large talent pool they have to contend with increasing costs. They also are seeing increasingly rising employee turnover. Tier II cities have established themselves as destination for IT and ITES companies and include locations like Pune, Chandigarh and Kolkata. These cities are also now squarely on the radar of IT and ITES occupiers. Tier III cities include state capitals in most cases and in some cases nodal cities, which are emerging as the new destination for IT and ITES occupiers like Kochi, Bhubaneswar, Thiruvananthapuram, Coimbatore, Indore, Ahmedabad, Jaipur, Nagpur and Nashik.
FACTORS COMPELLING CHANGE
The hunger to have the best talent, in order to stay ahead of the rest, is a fact of life for occupiers. As the cost of recruiting and retaining human capital headed north in established hubs, it has compelled occupiers to look for new talent pools. This is not to say there is no attrition in new locations, but the rate of attrition is relatively lower compared to more mature markets. According to a study done by Mafoi (Talent Pool Mapping Study: 2006), on an average, the attrition rates in more established locations like Delhi, NCR, Bangalore and Mumbai ranges between 25-40 per cent. Comparitively the attrition rate in Tier II cities like Pune and Chandigarh is a little lower at between 10-25 per cent.
The high turnover rates is one part of the story, rising salaries is another. The difference in salaries between locations is one of the reasons for companies to look at new locations, in a bid to reduce their costs. The difference in salary at the entry level between a Tier I location and a Tier II location is approximately 19-22 per cent while in case of a Tier I and Tier III location, the difference increases up to 42-57 per cent.
The report further says, while it is good to say that Tier II and III cities hold the future for the IT & ITES industry, these new locations are not without their own issues. Occupiers looking at expanding to such new locations should carefully evaluate the fitment of such cities with their business strategy.
Human Capital is by far the most important factor while deciding on a new location. Availability of good infrastructure is paramount to the success of operations for occupiers in new locations. One key parameter that needs to be evaluated is connectivity of such new locations with established metropolitan cities, as in many cases bad connectivity could lead to several problems.
Low cost of real estate is just one part of the story. Occupiers need to secure good quality office real estate at appropriate costings in new locations. Although large national level developers have started to move into Tier II and III locations, there may be cases where ready availability of Grade A space may be limited in the short terms. In addition it is important to consider the softer issues about a location which may be equally important for attracting and retaining employees. These could include issues such as quality of life, general city environment, availability of entertainment.
The SEZ is still a recent phenomenon, the SEZ policy and issues are anticipated to evolve over a period of time and this will mean changing dynamics and hence occupiers need to be constantly aware of such changes and have an element of flexibility in their strategy to adapt to these changes.
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