Research India 30 Real Estate Opportunities in Tier III Cities

World Winning Cities

Global Foresight Series

India30Real Estate Opportunities in Tier III Cities

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India’s City Tiers

Defining City TiersJones lang laSalle’s city tiering system is based on the combined current levels of real estate activity (supply and demand) in three key sectors – offices, retail and hospitality.

● Tier I cities currently comprise of delhi, mumbai and bangalore;

● Tier II cities comprise of Chennai, hyderabad, Pune and Kolkata;

● Tier III cities comprise of the India30 cities.

Cities can move between tiers as market circumstances change. Kolkata, for example, moved from a Tier III to Tier II city in 2007 to reflect increasing levels of real estate activity. Similarly in Chennai, real estate activity is growing so rapidly that the city may be reclassified as a Tier I city in the near future.

mumbai

bangalore

hyderabad

Chennai

Pune

Tier II Tier III (India30)Tier I

delhi

Kolkata

Fig 1: Real Estate Opportunity Map

Source: Jones lang laSalle, 2008

● This latest report from Jones lang laSalle’s World Winning Cities Research sets out to provide fresh insights into the long term real estate opportunities and risks across India’s Tier III cities.

● The research highlights 30 cities – the India30 – which we believe will be the focus of new real estate activity outside of India’s major metros over the next decade. The India30 will set the benchmark by which other Tier III cities will be measured.

● Our Real Estate Opportunity map (Figure 1, below) provides a high level summary of our research and analysis of macro-economic parameters, real estate fundamentals, future growth drivers and risk profiles across the India30.

● We have short-listed 10 Tier III cities which offer the strongest real estate potential combined with lowest market risk:

Five cities stand out – Ahmedabad, Chandigarh, Kochi, Jaipur and nagpur. This group already have rapidly

growing real estate markets due to their city size, market reach and connectivity.

A second group of mainly southern Indian cities – Coimbatore, mangalore, Thiruvananthapuram, Visakhapatnam, and Goa – also score well and have growing consumer markets.

● We believe that three key factors will affect the long term economic success of Tier III cities – infrastructure, human capital and governance. It will be those cities, led by proactive visionary governments which invest in infrastructure and education, that will be best positioned to succeed. Whilst affordability is currently driving the move into Tier III cities, continuing to rely solely on cost savings (relative to lndia’s major metros) will not be sufficient to ensure future long term growth.

● Our research highlights that the risk profile varies considerably in the India30, reflecting the diversity of operating conditions across India. however in

World Winning Citieslaunched in 2002, Jones lang laSalle’s World Winning Cities research programme is a multi-year project designed to identify the rising urban stars in emerging markets in Asia, Central and Eastern Europe, the middle East and north Africa.

Three major thought pieces on the Indian real estate market have been produced by World Winning Cities

● India Tier III Cities; The next IT Offshoring locations (2005) provides an assessment of prospects for 17 Tier III cities as potential locations for IT offshoring. We identify five cities that are best positioned to emerge as major centres over the next five years.

● Investment Futures (2006) assesses the opportunities in the Indian Real Estate Investment market following the relaxation of FdI regulations, which has generated substantial interest from cross-border investors.

● India Retail – “The India 50” (2007) sets out to explain and predict the emerging geography of Indian retail activity and property opportunities. We identify and develop a new typology for 50 cities that will be on the radar screen of retailers, developers and investors.

India30 Executive Summary

Transparency

Lowest Highest

Goamangalore

AhmedabadJaipur Kochi

Suratlucknow

bhubaneshwarVadodaramysore

Thiruvananthapuram Visakhapatnam

Coimbatorenagpur Chandigarh

AgraKanpur

Guwahati

JalandharAmritsarbhopal

VijayawadanashikIndore

ludhiana

Allahabadmeerut

VaranasiPatna

Jodhpur

Lowest Potential – Highest Risk

Highest Potential – Lowest Risk

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India30, 2008 3

contrast to many perceptions, our research indicates that levels of risk in some Tier III cities are no different than in the main metros. For example, Chandigarh, Kochi and nagpur have levels of real estate transparency similar to Tier I and II cities.

● The growth of the office markets across Tier III cities is being driven by cost advantages in real estate and labour. While these cities may have robust and diverse economies, the charge in the commercial real estate market is often led by domestic IT & ITES companies which have already moved en masse into Tier III cities such as Chandigarh, Jaipur, Ahmedabad, Kochi and Thiruvananthapuram. With affordability and talent pools high on the agenda, many southern cities such as Coimbatore, Kochi, Thiruvananthapuram, mysore and mangalore, as well as Ahmedabad, Jaipur and Chandigarh are attracting attention. Our Affordability Index (Figure 2, below), which is calculated by averaging Grade A office rents across all business districts in a given market, illustrates the vast difference in commercial rents across India’s Tier I, Tier II and Tier III cities. For example, in Peripheral business districts (Pbds) of the India30, office rents can be less than 20% of those found in comparable areas of mumbai.

● domestic retailers and mall developers are moving into less saturated Tier III cities. A third of the 300 new malls expected to be developedoverthenextfiveyearswillbein Tier III cities. large, growing consumer markets point to the cities in Gujarat and Kerala, along with Chandigarh, Jaipur, and Lucknowcontinuingtoreceivesignificantretailer attention. In particular, favourable retail opportunities exist in Chandigarh, Kochi, Surat, Visakhapatnam and Vijayawada.

● In contrast to the office and retail sectors, the hospitality sector is well developed in some Tier III cities. Six cities stand out – Goa, Jaipur, Kochi, Ahmedabad, Agra and Thiruvananthapuram. In Goa and Agra, demand is driven by tourism, and while tourism is also a primary driver in Kochi, Thiruvananthapuram and Jaipur, their strengthening corporate bases are boosting business demand. Going forward, we expect revenue from mICE services to contribute a larger share of the pie, and a greater level of differentiation to exist with budget hotels, luxury resorts and other hospitality destinations.

● Sizeable opportunities exist within the India30, but our analysis suggests that prudent investors should be focusing on particular sectors or development types when venturing into Tier III markets. Risk-averse foreign investors will continue to focus on the perceived safety of Tier I and II cities, a trend that is being reinforced by the global economic and financial uncertainties. This may represent an opportunity over the short term for domestic investors who are well versed with specific Tier III markets to selectively engage in lucrative projects. Over the longer term, as the investment community’s interest is refocused on Tier III markets, we anticipate the India30 will offer new opportunities for both domestic and foreign real estate investors, developers and occupiers.

Fig 2: Commercial Space Affordability Index


0

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The India30 will be the focus of new real estate activity outside of India’s major metros and will be the benchmark by which other Tier III cities will be measured

4 India30, 2008

The Indian commercial real estate market has been in existence for barely a decade, but during this time the country has witnessed exponential growth in its real estate provision. The overwhelming focus so far has been on India’s major metros: India’s Tier I cities (delhi, mumbai and bangalore) and increasingly its Tier II cities (Chennai, hyderabad, Pune and Kolkata). These top 7 markets are all now regularly cited in world city rankings and feature on the radar of cross-border occupiers, investors and developers.

yet as the Indian real estate market has gradually matured, we have subsequently witnessed the expansion of the commercial real estate sector into India’s tertiary cities, a trend that was first highlighted by Jones lang laSalle back in 2005 when we identified the potential of India’s Tier III cities as IT offshoring locations.1 Since 2005, real estate activity has progressively widened and deepened into Tier III cities as service companies have sought out cost-effective, skill-rich business locations, and as retailers have responded to the rapid increase in consumer purchasing power beyond India’s major metros.

making sense of the real estate opportunities in a country as large and diverse as India is a major challenge for the real estate sector. Our India30 research aims to short-cut this process by focusingon30citieswhichreflectthediversityofopportunity and risk across India. We believe these cities will set the benchmarks against which other cities will be measured. The India30 includes all tertiary cities with populations over 1.5 million (16 cities), together with 14 smaller cities which have been selected on the basis of IT, retailer and hotels activity. Some of these cities, such as Ahmedabad, Chandigarh and Kochi already have active real estate markets; others are only just appearing on the radar screen.

The India30 still account for a relatively small proportion of real estate activity (21% of modern officesand34%ofshoppingmalls),butwith41%of the country’s wealth, the potential of these tertiary markets is clearly evident. domestic players continue to expand rapidly into Tier III cities, and whilst foreign players are currently adopting a cautious approach in today’s uncertain global economic climate, over the longer term we anticipate the India30 will offer new opportunities for both domestic and foreign real estate investors, developers and occupiers.

Introducing India30

1 India: The next IT Offshoring locations, Tier III Cities, Jones lang laSalle, 2005

Fig 6: Wealth Distribution

Source: market Skyline of India, Indicus Analytics

India3041%

Tier 1 Cities34%

Tier 2 Cities25%

Fig 4: Shopping Mall Stock


India3034%

Tier 1 Cities49%

Tier 2 Cities17%

Fig 5: 4-Star and 5-Star Hotels


India3046%

Tier 1 Cities36%

Tier 2 Cities18%

Fig 3: Office Stock


India3021%

Tier 1 Cities46%

Tier 2 Cities33%

Parliament, delhi

India30, 2008 5

Market PositionApproximately21millionsqmofGradeAofficespace exists throughout the whole of India today, broadlyequivalenttotheofficestockinChicagoorWashington dC. Of this, 80% of this space is found in India’s seven Tier I and Tier II cities.

GradeAofficespacestockwithintheIndia30isestimated to be 4.7 million sq m. most of this is concentrated in just six cities – Ahmedabad, Chandigarh, Jaipur, Kochi, nagpur and Thiruvananthapuram – and is largely located in business parks and SEzs. new construction is typically found in the peripheral areas of Indian cities, where larger parcels of land are available andconnectivityisbetter.Manyfirmswithlargeroperations typically opt for built-to-suit campuses in Tier III locations rather than speculative space.

Why Tier III?Affordability, both in terms of real estate and labour, is the principal driver behind many corporations having a presence in Tier III markets. Grade A office rents can range from 20–40% of the levels found in peripheral areas of the large metros, such as mumbai. labour costs are also substantially lower with many Tier III locations having wage rates that are ¼ the levels found in Tier I cities.

Affordability is particularly important to firms that specialize in IT, ITES and bFSI back office operations. These firms are the primary occupiers of Grade A office space in Tier III markets as they rely on the potential cost savings which these markets provide to remain competitive within their industries.

MNCsandlargerIndianfirmstypicallyexpandinto Tier III markets rather than set up headquartersthere.Whenwellknownfirmssuchas IT/ITES majors – Wipro, Infosys, and Tata Consultancy Services (TCS) – announce their intention to venture into a new Tier III market inIndia,theyareusuallyfollowedbyotherfirmsfrom a variety of industries who assume that the potential of that market has been vetted and vouched for by these market pioneers.

many international and domestic firms are using their Tier III operations to complement, rather than replace, their existing work forces in Tier I and Tier II locations. A common misconception is that low skilled work is carried out in Tier III locations and high end functions remain in Tier I and Tier II cities where talent is concentrated. however, cities like Ahmedabad, Chandigarh, Kochi and Jaipur are challenging the perception that skilled labour cannot be found in Tier III cities. moreover, the southern states of Kerala, Karnataka and Tamil nadu have seen the emergence of IT hubs in mysore, mangalore, Coimbatore and Thiruvananthapuram as companies tap into the local talent pools.

State of the Nation – Offices

Fig 7: Commercial Affordability vs. Mumbai (CBDs)


< 10%

10–15%

15–20%

20–25%

25% <

100%

VijayawadaVisakhapatnam

Coimbatore

BhubaneshwarPatna – Ahmedabad

Allahabad – Mangalore – Nashik Amritsar – Goa – Ludhiana – Mysore

Indore – Jodhpur – Varanasi – Kochi – Lucknow – Agra

Chandigarh – Kanpur

Mumbai

Jalandhar – Surat – Thiruvananthapuram – Guwahati Nagpur – Jaipur – Bhopal – Meerut – Vadodara

most Grade A office space within the India30 is concentrated in just 6 cities – Ahmedabad, Chandigarh, Jaipur, Kochi, nagpur and Thiruvananthapuram

6 India30, 2008

Infosys and TCS have been aggressive in expanding their operations into Tier III markets. Each now has major facilities in more than half a dozen Tier III cities. Infosys, headquartered in bangalore, and TCS, headquartered in mumbai, have seen exponential growth over the past 15 years. Faced with rising real estate and labour costs in their respective Tier I markets, the firms have ventured out to Tier III cities from where much of their own workforces originate.

mnCs in India have also started to expand into Tier III markets. hSbC has set up 47 branch offices throughout India and has a presence in half of the India30 cities. most mnCs, such as Genpact (Jaipur), Ibm daksh (Chandigarh & Visakhapatnam), Affiliated Computer Services (Kochi) and Sutherland Global (Kochi), are not as aggressive in their expansion and have typically just one or two offices outside of India’s major metros. yet, the presence of multinational corporations in Tier III cities is expected to increase as labour and real estate costs in Tier I and Tier II cities continue to rise and some Tier III markets, such as Kochi, Ahmedabad and Chandigarh, continue to mature towards having the characteristics of Tier II cities.

Fig 10: Corporate Expansion into the India30

Source: Company websites

Fig 8: Labour Costs in Tier I, II and III cities

Source: ma Foi management Consultants, 2006

AhmedabadCoimbature

KochiNagpur

JaipurVizag

IndoreMangalore

ChandigarhKolkata

HyderabadPune

BangaloreChennai

Delhi (NCR)Mumbai

Annual Salary (USD)ITESIT

0 1,000 2,000 3,000 4,000 5,000 6,000 7,000 8,000 9,000

Fig 9: Grade A Office – Relative Rents in Peripheral Areas


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MangaloreMysore

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Infosys Locationsin the India30

ThiruvananthapuramKochi

Ahmedabad

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Nagpur

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LucknowPatna

Coimbatore

HSBC Locationsin the India30

Mumbai

Chandigarh

Jaipur

Ludhiana

Jodhpur

Mysore


AhmedabadVadodara

Bhubaneshwar

Lucknow

Coimbatore

TCS Locationsin the India30

Goa

Mumbai

India30, 2008 7

Current Office Market ActivityIn order to assess the current levels of office market activity across Tier III markets, we measured a variety of factors including the Grade A office stock, the existence of SEzs, the presence of key occupiers across the IT & ITES industries and the number of staff employed by these occupiers in each market.

The top 10 most active markets within the India30 are set out below. In northern India, Chandigarh is India30’s most active office market, while Jaipur’s office market is also growing rapidly. half of the top 10 are located in India’s southern region – Kochi, Thiruvananthapuram, Coimbatore, mangalore and mysore. nagpur, which may not traditionally be perceived to have an active office market due to a relatively low level of IT/ITES occupiers, has scored well due to relatively high levels of Grade A office stock and a large office workforce being employed in the city.

Fig 11: Current Office Market Activity – Top 10


Fig 12: IT/ITES Penetration


City

Kochi

Chandigarh

Thiruvananthapuram

bhubaneshwar

Vadodara

Coimbatore

Jaipur

Ahmedabad

Goa

Indore

lucknow

mangalore

mysore

bhopal

nagpur

nashik

Visakhapatnam

Agra

Allahabad

Amritsar

Guwahati

Jalandhar

Kanpur

ludhiana

meerut

Patna

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Varanasi

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Ludhiana

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Mangalore

Coimbatore

Ahmedabad

Jaipur

Thiruvananthapuram

Nagpur

Kochi

Chandigarh

Affordability, both in terms of real estate and labour, is the principal driver behind many corporations having a presence in Tier III markets

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8 India30, 2008

KochiA southern Indian city with a diversified local economy and over 1.5 million inhabitants, Kochi is seen as a prime example of the potential of India’s Tier III cities. While the traditional sectors of tourism, port activities and gold trading remain strong in Kochi’s economy, the new economy sectors of IT/ITES and bFSI are becoming increasingly active. Kochi’s growth into a commercial hub is driven by its excellent connectivity, low labour costs and low attrition rates, and lower cost real estate compared to Tier I and Tier II cities.

As with most Tier III cities in India, Kochi’s resurgence is occurring outside of the city centre in the peripheral areas of Edapally and Kakkanad, where land is more plentiful. The existing business parks of Infopark and the Cochin SEz will be complimented by the planned SmartCity and Cyber City developments. many Indian and international occupiers – such as Wipro, TCS, Cognizant, and Citibank – have already established a large presence in the city, with more firms also planning to set up facilities.

Foramorein-depthanalysisoftheKochirealestatemarket,pleaseseethelatestcityprofilebyWorldWinningCitiesentitledKochi – India's Rising Urban Star.

Kochi Coastline © Sunil C.K., 2008

India30, 2008 9

Fig 13: Current Retail Market Activity – Top 10


State of the Nation – RetailSincethecompletionofthefirstshoppingmallin1999, India has seen a steady migration from traditional formats into retail malls. As recently as 2002 there was only 100,000 sq m of shopping mall space, but today there are no fewer than 120 malls totalling 3.9 million sq m. So far, shopping centre development has been focused on India’s major metros, with two-thirds of India’s shopping stock currently located in India’s seven Tier I and Tier II cities.

The exponential growth of India’s retail sector is expected to continue until at least 2010, by which time the shopping centre stock could be as high as 8.25 million sq m. Whilst the major metros will continue to account for most new retail development, we are witnessing a gradual shift in retailers’ and developers’ focus towards India’s smaller cities. A third of the 300 new malls that are tobedevelopedinIndiaoverthenextfiveyearswillbe located in Tier III cities.

Why Tier III?While new retailers in India (both domestic and international) are still focused on major metros, expanding retailers and mall developers are now selectively focusing on Tier III cities. In general, Tier III cities offer favourable opportunities for retailers due to growing consumer markets, lower property costs and considerable latent demand for branded goods in the larger Tier III cities. most Tier III cities are also less

saturated than India’s metros, and are less likely to face future competition from international players.

by our estimates, a quarter of the total expected growth in the organized retailing sector will occur in Tier III cities. These markets are witnessing strong growthinincomeand,moresignificantly,changinglifestyles and aspirations along with a fundamental shift in the consumer mindset. For many smaller Tier III markets, however, success for developers and retailers ispredicateduponcapturing‘firstmoveradvantage’.

hypermarkets are regarded within India as a bellwether for organized retail development and, thereby, retail growth. These larger format stores cater to a class of consumers who are younger, more urban and have a higher proportion of disposable income. The robust expansion of hypermarkets into TierIIIcitiesisatestamenttotheconfidencemanyretailers have in the future potential of these smaller cities.Hypermarketpresencevariessignificantlyacross the Tier III markets, with the highest concentrations found amongst the larger Tier III cities.

Current Retail Market ActivityConsiderable differences exist in the depth of retail market activity across the India30. Our analysis of these markets has taken into account both the presence of key retailers as well as existing shopping centres. Ahmedabad, as the largest city of the India30 has the most extensive retail provision, with characteristics closer to those of Tier II cities. Several northern Indian cities also have active retail markets – notably Chandigarh, ludhiana, Jaipur and lucknow – due to high incomes and strong brand awareness. Kochi and Surat are set to witness high growth as new retailers enter these markets and new retail projects come online.

While most Tier III markets are smaller and more nascent in their development as retail destinations, they have started to show signs of maturing and a shift in momentum. demand for space by retailers is starting to slow in some markets as a result of a better understanding of local consumers and a realization that standardized formats will not necessarily work in all markets.

Low High

ScoreJalandhar

Surat

Amritsar

Indore

Kochi

Lucknow

Jaipur

Ludhiana

Chandigarh

Ahmedabad

A gradual shift in focus towards India’s smaller cities has resulted in a third of new malls having been announced in Tier III cities

10 India30, 2008

Fig 14: Retail Momentum


developers in some Tier III markets are now suffering from the effects of their overly optimistic assumptions on retail space absorption. The issue of too much supply of retail space isn’t restricted to only small Tier III markets. Ahmedabad, one of our largest and most active retail markets is currently suffering from a short term oversupply of retail

space. As with other Tier III cities, this has led to a dampening of market transactions and a correction of rental levels. While developers, occupiers and investors should be astutely aware of the shift in market momentum, we believe this to be a short termphenomenonratherthanareflectionofabroader long term trend in Tier III markets.

City Demand Supply “Transaction Levels”

“Rental Values”

Observations

1 Agra low high low ▼ high vacancy, exodus due to lack of consumption, supply concentrated in one area of city.

2 Ahmedabad low medium low ▼ Short term oversupply, low consumption growth.

3 Allahabad medium low low ► no high quality supply or developers. nothing of quality currently in pipeline.

4 Amritsar high medium medium ► Satellite city that is a part of the Chandigarh-ludhiana-Jalandhar retail circuit.

5 bhopal medium low medium ► Virgin market, new supply just opening up. not many high quality developments.

6 bhubaneshwar medium low low ► Activity low, but interest levels from developers remains high.

7 Chandigarh high medium medium ▼ looming supply boom (including mohali). Rental rates, which were too high to begin with, are now correcting.

8 Coimbatore medium low low ► large number of students and value shoppers. A mix of developers are operating in this market.

9 Goa low low low ► Retailers are split on the consumption potential of this city’s small population. many announced projects not getting off the ground. Tourism affects shopping mall development patterns.

10 Guwahati medium low low ▼ Short term oversupply. Retailers are still exploring consumers choices in this market.

11 Indore low high medium ▼ Oversupply looming. developers are not showing signs of construction slowdown. Price-conscious consumers dominate the market.

12 Jaipur low medium low ► no quality developments in place, though some are on the horizon. Oversupply concerns exist.

13 Jalandhar medium medium medium ► Eclipsed by events in ludhiana. no notable projects on horizon.

14 Jodhpur low medium low ► Initial buzz of activity. Is still a nascent market with limited potential due to demographics.

15 Kanpur medium low low ► despite a large population, there remain doubts about city’s potential. no takers for brands as market is dominated by value consumers. no quality developments.

16 Kochi medium medium medium ► no quality developments in short term despite a big pipeline. Price correction looming.

17 lucknow medium high medium ▼ Oversupply looming in some pockets. Rentals not sustainable due to exodus of retailers.

18 ludhiana medium high low ▼ Oversupply looming. Occupiers waiting for prices to correct.

19 mangalore low medium low ▼ Proximity to the university town of manipal leads to high number of student shoppers. demographics do not support rental values.

20 meerut low medium medium ► market is largely untested so far. demographics do not support high retail growth.

21 mysore low medium medium ► despite a few quality developments, market is still not fully tested by brands and national retailers.

22 nagpur medium high medium ▼ Oversupply. Success of mIhAn is critical for the development of the city and its retail market.

23 nashik medium medium medium ► large population base with price-conscious consumers. market is balanced in terms of supply and demand.

24 Patna low medium low ► despite large population, only a few brands are present. Activity levels are low. Retailers keep a close eye on political situation.

25 Surat high medium high ► CentreofIndia’sdiamondindustry.Relativelyhighnumberofaffluentconsumers.Marketisstilllargely untested.

26 Thiruvananthapuram medium medium low ► most brands present. demand currently exceeds supply.

27 Vadodara medium high low ▼ brands present but price-conscious market precludes multiple outlets. Some quality developments exist. Oversupply looming.

28 Varanasi low low low ► untested market with low levels of activity currently.

29 Vijayawada medium medium high ► Solid brand presence with small but consistent level of retail activity.

30 Visakhapatanam medium medium high ► Stable retail activity and good brand presence.

India30, 2008 11

AhmedabadAs the financial capital of the state of Gujarat, Ahmedabad is the seventh largest metro in India and has a population of over 5.3 million, putting it in the same league as bangalore, hyderabad and Pune. Ahmedabad has developed into one of the hottest retail markets in all of India due to a large consumer base that is wealthy, brand savvy and disposed to spending, all of which has led the city to witness a flurry of retail development activity recently.

The number of households in Ahmedabad that fall into the SEC A or SEC b group is higher than virtually any Tier II or Tier III city in India. many international and domestic brands such as nike, Reymonds, Pantaloons and Wills lifestyle have already established a presence in the city, either along CG Road, the main high street in the city, or at one of the six operational malls that exist in the city. This 170,000 sq m of mall space is not enough to satisfy demand from retailers and an additional six malls totaling 280,000 sq m is expected to come online by 2010.

Gallops mall, Ahmedabad

12 India30, 2008

Market PositionIn India today, there exists approximately 185 5-star and 5-star deluxe hotels with over 31,000 rooms. While this is considerably less than the level found in China (which has more than 300 5-star hotels), it exceeds the 114 5-star hotels found in Thailand, an economy a fifth of the size of India but where the hospitality infrastructure is considerably more developed. This serves to highlight the strong growth potential of India’s hospitality sector which is now witnessing very robust growth with, for example, a 13% year-on-year increase in international air passengers during 2006–2007.

In contrast to both the offices and retail sectors, which are highly concentrated in India’s Tier I and II cities, almost half of India’s 5-star and 5-star deluxe hotels are found in India’s Tier III cities. Of these, a significant proportion is found in just five locations – Goa, Jaipur, Kochi, Agra and Ahmedabad – largely a reflection of India’s geography of high-end tourism. This distribution is also in strong contrast to China, where only 13% of 5-star hotels are found in Tier III cities.

most major international hotel groups already haveafirm,butlimited,presenceinIndia.Theaggressive expansion into numerous Indian markets, including many Tier III cities, by multinational hoteliers such as Starwood hotels & Resorts and marriott International will result in international operators having a greater market share than their domestic counterparts within the next 3 years.

Fig 16: Current Hotel Market Activity – Top 10


State of the Nation – Hotels

Low High

ScoreCoimbatore

Jodhpur

Lucknow

Chandigarh

Agra

Thiruvananthapuram

Ahmedabad

Kochi

Jaipur

Goa

Fig 15: 5-Star Hotels


India3045%

Tier 1 Cities38%

Tier 2 Cities17%

Tier 3 Cities13%

Tier 1 Cities49%

Tier 2 Cities38%

China

India

nearly half of India’s 5-star and 5-star deluxe hotels are found in Tier III cities

Fig 17: Foreign Tourists into India

Source: Government of India, ministry of Tourism

1,000,000

0

2,000,000

3,000,000

4,000,000

5,000,000

6,000,000 30%

25%

20%

15%

10%

5%

0%

-5%

-10%1998 1999 2000 2001 2002 2003 2004 2005 2006 2007

Foreign Tourists % Change Y-O-Y

India30, 2008 13

Two of the most active domestic hotel operators in India are the Taj hotels and ITC hotels. As India’s leading operators of 4- and 5-star hotels, both organizations have ventured deep into Tier III markets. Taj hotels, in particular, has a footprint extending into over half of the India30.

Why Tier III?Increased business travel (due to strong economic growth and improving connectivity), higher international and domestic tourism and the emergence of low cost airlines are fuelling strong demand for hotel accommodation and mICE facilities across India’s Tier III cities.Tourism is expected to be the primary driver of the hospitality industry across India’s Tier III cities, focused on India’s top international tourist destinations such as Goa, Jaipur, Agra and Thiruvananthapuram. many Tier III cities offer massive potential across a range of tourist activities from cultural heritage and historic sites in Jaipur and Agra, Ayurveda and wellness spas in Kochi and Thiruvananthapuram, beach resorts in Goa, eco-tourism in Coimbatore and religious tourism in Varanasi. India’s ministry of Tourism is also actively promoting and providing

support for rural tourism, medical tourism, cruise tourism and adventure tourism in numerous locations throughout the country.

Current Hotel Market ActivityThe India30 have been evaluated across a set of parameters that include the presence of business & luxury class hotels, the size of the hospitality service sector, business demand, and leisure and business travellers. Goa emerges as the clear front runner; while it does not lead the India30 in terms of business demand, Goa stands head and shoulders above the India30 in terms of the number of hotels and the size of its local hospitality sector.

A similar situation exists, though to a lesser degree, for Jaipur and Agra, although Jaipur benefitsfromhigherlevelsofbusinessdemandthan does Goa. The Kochi and Thiruvananthapuram markets are driven by both high levels of foreign tourists as well as burgeoning local IT/ITES industries. The Ahmedabad and Chandigarh markets are fuelled primarily by their strong local commercial activities.

Fig 18: Hotel Presence in India30

Kochi

Ahmedabad

Vishakhapatnam

Coimbatore

Starwood Hotelsin the India30

Jaipur Agra

Mysore


Ahmedabad

Vishakhapatnam

LucknowVaranasi

Agra

Vijaywada

Chandigarh

SuratVadodara

Nashik

JaipurJodhpur

Taj Hotelsin the India30

GoaMangalore

Sour

ce: C

ompa

ny w

ebsit

es

Taj lake Palace, udaipur

14 India30, 2008

Goa & JaipurThe cities of Goa and Jaipur are the top two tourist destination within the India30. both have international airports and local economies that are geared towards tourism (although Jaipur has a more diverse economy than Goa). both are also key stops along routes for some of India’s most well known luxury trains.

Goa is India’s most well known beach destination and attracts many international holidaymakers from Asia, Australia and Europe.

Jaipur is part of the Golden Triangle tourist circuit (along with delhi and Agra) and has many historic sites.

A third of all 5-star, 4-star and heritage hotels in Tier III cities are found within Goa and Jaipur. Excellent connectivity (air, road & rail) and established tourism services have earned Goa and Jaipur the top 2 spots for tourism infrastructure amongst Tier III cities.

bamboo huts in Goa

India30, 2008 15

Regulations on Foreign direct Investment in India were liberalized in march 2005. Since then, approximately uSd 11 billion has been invested in the India real estate market. A great majority of that, approximately uSd 4.5 billion, flowed into the country during 2007. despite the turmoil in global capital markets that have existed for the past year, investors have continued to look to India for opportunities in the real estate sector, although at a slowing pace.

Raising public debt in India has historically been a difficult task. With a reduced supply of domestic private debt, international capital flows ebbing and the cost of borrowing rising, Indian developers are increasingly utilizing private equity to fund new projects. Of the estimated 150 private equity funds operating in India, two-thirds have operations on the ground and are actively sourcing and completing investment transactions throughout India, albeit at a slower rate than in 2007.

A Short History of Real Estate Investment in India30

Fig 19: Announced Investments in India (1H 2008)


Tier 1 Cities63%

Tier 2 Cities33%

India304%

Fig 21: Investment Characteristics


Parameters Tier I & II Cites Tier III Cities

First mover advantage not necessary Critical

location within municipal limits not necessary Critical

deal size medium or large (starting at uSd 10 million)

Small (up to uSd 10 million)

deal structure Ranging from simple equity to preferred returns involving substantial premium

Prefer entry at cost and/or capital protection with low premium Funds want to see a clear exit in 4–5 years

Project size Ranging from barely FdI compliant to double digit acres many times higher than 100 acres

Occupier commitment(pre-sale or pre-lease) Preferred Strongly preferred

Strong partnership with quality developer/promoter Important Critical

Fig 20: Noted Investments in Tier III Markets by Real Estate Sector


Retail Ahmedabad – Chandigarh

Hotels Goa – Jaipur

IT Parks/SEZs nagpur – Kochi – Jaipur

Mixed Developments Indore – Visakhapatnam

16 India30, 2008

Tier III Investment ClimateA combination of recent events has caused international investors, namely private equity funds, to shy away from Tier III markets recently. As risk is being re-priced globally, managers of foreign capital are seeking exceptionally high rates of return in order to continue to invest in Tier III markets. At the same time, real estate markets in Tier I and Tier II cities have started to rationalize and offer more reasonable project valuations. While India’s seven Tier I and Tier II markets offer a lower rate of return, the perceived stability they offer relative to Tier III cities has been instrumental in convincing virtually all private equity funds to stick with Tier I and Tier II markets for the time being.

however, in Jones lang laSalle’s 2008 Global Real Estate Transparency Index, Indian Tier III cities achieved transparency score close to their Tier I and Tier II counterparts. Indian Tier III cities ranked 62nd out of 82 global markets surveyed and scored higher than many other favoured investment destinations around the world such as Turkey and Vietnam. India’s Tier III cities also scored higher than China’s Tier II and Tier III cities. moreover, the transparency gap between India’s Tier III cities and its large metros is expected to narrow in the future as these cities go through the same evolution as did their Tier I and Tier II counterparts nearly a decade ago.

The risks and opportunities that exist in India’s Tier III markets are very different than in larger Tier I and Tier II metros. Indeed, the very nature of investment transactions is unique and requires a different approach than that of other Indian markets. Generally speaking, finding the right partner, having a first mover advantage, and locating projects within the city limits are a few of the key attributes of successful Tier III projects, especially those in smaller, more nascent markets.

OutlookTier III markets can vary considerably in their levels of economic maturity and real estate development, and hence the opportunities within these markets can also be quite disparate in nature. Furthermore, these opportunities may not be consistent across all real estate sectors. Prudent investors need to be focused on a particular sector or development type when venturing into Tier III markets.

While foreign capital will continue to focus on safer Tier I and Tier II markets, this may represent an opportunity for domestic investors. As we noted in our recent report – Real Estate Transparency in India – 4% of the total amount of investment funds (domestic and international) that have been announced in India in 1h 2008 are expected to go to Tier III cites. While the immediate future may see a decline in Tier III cities’ shares of investment funds, we expect this trend to reverse over the long term as Tier III markets continue to offer better risk adjusted returns than larger Indian metros.

A bright spot on the horizon for Tier III markets is the expected introduction of real estate mutual funds into Indian markets in the near future. Allowing participation from individual investors would not only deepen real estate markets in India but also increase investor focus on the 35 cities that the Securities and Exchange board of India, the nation’s market regulator, has identified as acceptable destinations for investment.

Of the India30, 21 cities – along with all Tier I and Tier II cities – are on the list of 35 cities that have been “green-lighted” by the SEbI. not all cities will necessarily be able to take advantage of this initiative as finding investment grade assets in many Tier III cities remains a challenge, especially outside of the residential sector.

India30, 2008 17

Prozone-Libertyliberty International, a uK-based property company with investments of £ 8.6 billion (uSd 15.3 billion), entered into a joint venture with Provogue, a premier Indian apparel manufacturer and retailer. liberty acquired approximately 25% of Provogue’s retail infrastructure subsidiary Prozone Enterprises in 2007 for InR 2.02 billion (uSd 43 million).

The joint venture, named Prozone-liberty, will focus on developing and managing shopping centres in four Tier III cities:

Aurangabad, Indore, Jaipur and nagpur. These projects, including a 97,500 sq m mall under construction in Aurangabad, will all be FdI compliant.

The partnership allows Prozone to access the knowledge and best practices of liberty while allowing liberty to gain from Prozone’s knowledge of Indian retailers and the emerging organized retail sector in India.

18 India30, 2008

While the drivers of city success are diverse and complex, and there are many different “winning formulae” that can catapult a city onto the global arena, we have identified three broad sets of drivers – infrastructure, human capital and governance – which we believe represent the critical elements necessary for growth amongst Indian cities.

InfrastructureInfrastructure is widely regarded as the single biggest challenge to development in India. After decades of neglect, the Indian government is now scrambling to address the infrastructure deficit that exists throughout the country. The multitude of projects that have been identified throughout the country will cost billions of rupees and take decades to execute. Special Economic zones and private business parks, which offer quality and reliable power, water and roads, are some of the measures that government and industry has adopted to address the need for quality infrastructure in the short term. Such facilities are found in every corner of the country offering even the smallest of cities the opportunity for economic advancement.

As part of our analysis on infrastructure, we have developed a Connectivity Index to assess a city’s linkages, both domestically and internationally, which takes into consideration airport, sea port, road and rail infrastructure. Our analysis indicates that most of the India30 are surprisingly well connected. Kochi, Ahmedabad and Goa scored the highest amongst their peers due to their exceptional performance across all indicators. They were followed by lucknow, Thiruvananthapuram, Coimbatore, Jaipur and mangalore, all of which placed above average by scoring well in air and road indicators plus one additional parameter such as sea port or rail access.

Twenty-six of the India30 have airports, twelve of which serve international destinations. This bodes well for cities such as Goa, Jaipur, and Thiruvananthapuram whose economies are primarily

driven by tourism. Five of the India30 cities have major sea ports and an additional nine have access to smaller ports nearby. All of the India30 cities are connected to at least one national highway and nineteen are connected to at least one major road corridor such as the Golden Quadrilateral. yet only six of the India30 have any existing or planned rapid transit systems, something that is vital to cope with thetrafficcongestionthatplaguesallofIndia’scities.

Future Drivers

Fig 22: Connectivity Index


Low

Below Average

Above Average

Average

High

MysoreMeerut

JodhpurNashikBhopal

LudhianaPatna

VijayawadaJalandhar

IndoreAllahabad

NagpurChandigarh

SuratBhubaneshwar

VaranasiVisakhapatanam

AmritsarKanpur

AgraVadodaraGuwahati

MangaloreJaipur

CoimbatoreThiruvananthapuram

LucknowGoa

AhmedabadKochi

Fig 23: Higher Education Institutes


0 50 100 150 200

VisakhapatnamThiruvananthapuram

LucknowCoimbatore

MysoreNagpurMeerut

LudhianaJaipur

BhopalAhmedabad

IndoreKanpur

BhubaneshwarMangalore

NashikAmritsar

AgraVijayawada

AllahabadVaranasi

JalandharKochiPatna

JodhpurSurat

VadodaraGuwahati

ChandigarhGoa Score

India30, 2008 19

India’s telecom sector is one of the world’s most dynamic, adding a record number of mobile subscribers month on month. The entry of private players and the existence of strong regulatory bodies have put in place the necessary elements to ensure continued robust growth and development. While India has witnessed stronger telecom penetration in its urban vs. rural areas, telecomneeds,includingmobilephones,fixedland lines and broadband internet, are rapidly being addressed throughout the country.

unlike telecom, utilities are a major area of concern. Reliable and affordable electricity is a major concern in most Tier II and Tier III cities, some of which routinely face power cuts due to load shedding. despite most states in India being net importers of electricity, there seems to be no quick fix for this problem. Politics, environmental issues and even unreliable monsoons can all make a significant impact on the availability and cost of power in India.

Human CapitalThe sunrise sectors of India’s economy (IT, biotechnology, pharmaceuticals and semiconductors) are driven as much by skilled workers as by any other factor. Indeed, the availability of human capital is a key driver of the success of any city. Educational institutes, the factories which produce skilled labour for the Indian economy, are found throughout Tier III cities in India. When cities were scored on availability of higher educational institutes on a per capita basis, southern cities (Thiruvananthapuram, Visakhapatnam, mysore, Coimbatore and mangalore) performed exceptionally well.

Kerala, a state in southern India with a literacy rate above 90%, far outperformed the national average which sits at just 65%. Its two representatives in the India30, Thiruvananthapuram and Kochi, are both developing into IT hubs, due in large part to the availability of skilled labour.

When the availability of higher educational institutes in relation to population is assessed at a state level, Karnataka stands out. mysore in particular is a key educational hub with a large number of high quality medical and engineering colleges located in the city. Graduates from these institutions have helped fuel the growing biotech and semiconductor industries, and have positioned Karnataka as the leading exporter of software technology amongst Indian states.

The quality of higher education institutes in India, rather than the sheer quantity, is a critical area of focus as employers are increasingly looking for highly skilled workers with specialized skills to compete in the global market place. A great majority of the campuses of India’s famed Indian Institutes of Technology, Indian Institutes of management, and the Indian School of business are found in Tier III cities, including 9 of the India30.

20 India30, 2008

GovernanceGovernance can make or break a city. Competitiveness amongst Indian cities is often dictated at the state level where most strategic policy decisions are rendered. It is often the foresight and tenacity of state governments which precipitate success at the city level.

For example the governments of the states of Andhra Pradesh and Kerala, are very active in promoting investment and tourism in their states. Andhra Pradesh’s government has gone beyond simply providing incentives for companies to move into the state. It now routinely performs international roadshows where it clearly articulates the advantages of doing business and investing in the state, notably in the cities of hyderabad and Visakhapatnam. The Kerala government is one of the most active in India in promoting tourism. Its ‘God’s Own Country’ marketing campaign, coupled with its investment in tourism infrastructure, has boosted international and domestic tourism and spurred development activity, notably in the city of Kochi.

The role that governance plays in determining the success of cities by drawing in new businesses cannot be overstated. Whilst it is common for states in India to vie for large industrial projects, only a few governments – such as those of Gujarat and Andhra Pradesh – have taken measures to establish a business-friendly climate. A comprehensive approach that addresses key issues, such as tax policy, and has a forward looking vision will be the strongest determinant of success for any city in India.

Developing Industry ClustersGiven the infrastructure deficit that exists within India currently, many industries find it necessary to form their own economic ecosystems where specialized resources and partners are concentrated. This holds true for small scale industries in particular. While much attention has been dedicated to Special Economic zones, industrial clusters are as critical to the success of many cities.

Clusters of a particular industry do not limit themselves to just one location. India’s pharmaceutical industry, for example, has clusters spread throughout nine states and 18 cities. The states of Gujarat, maharashtra, Andhra Pradesh and Goa have been especially active in establishing the necessary ecosystems to support pharmaceutical clusters. The cities of Ahmedabad and Goa have benefited in particular with pharmaceutical manufacturing and R&d services being firmly established there.

Jaipur and Ahmedabad stand out among the India30 in terms of the number of industrial clusters. While Ahmedabad is widely regarded as having a small yet diversified economy, Jaipur is considered by most to only be a hotbed for tourism. yet the city has a wide variety of clusters including electrical equipment, garments, jewellery/gems and handicrafts. Clusters in Ahmedabad, in contrast, were mostly of an industrial nature and produced high value products such as pharmaceuticals, industrial machinery, and electronics.

India30, 2008 21

MIHAN at NagpurThe multi-modal International hub Airport at nagpur (or mIhAn) is a mega project designed to take advantage of nagpur’s central location within India and Asia. The project, administered by the maharashtra government and funded through government sanctions and private lending, is spread over 4,354 hectares. Reliable infrastructure will be provided through measures such as a captive power plant and water and sanitation systems.

When completed, the mIhAn will encompass a multi-modal passenger and cargo hub, a new rail and road terminal, and an SEz

that will cater to, among other industries, specialized health services in order to promote health tourism. A new residential township, international school, and golf course will also be developed.

mIhAn’s impact to the economy of nagpur and its real estate market were immediately evident. boeing has decided to invest uSd 100 million in nagpur to develop its regional maintenance, repair and overhaul (mRO) facility. Over 3,000 new jobs are expected to be created, and other aviation companies have also started to explore nagpur for their own regional mROs. All of this has led to a real estate boom in nagpur which has seen leading Indian IT firms such as Satyam and l&T Infocity purchasing land to develop IT parks inside the SEz, encouraging real estate developers to begin planning for a wave of new residential development in adjacent areas.

India’s Key Transport Infrastructure

Visakhapatnam

Amritsar

JAmmu And KAShmIR

Guwahati

Jalandhar

mysore

Coimbatore

Jaipur

Allahabad

Vadodara

Ahmedabad

nagpurnashik

Indore

bhopal

VaranasiPatna

Kanpur

lucknowAgra

meerut

Vijayawada

bhubaneshwar

Thiruvananthapuram

hImAChAlPRAdESh

ludhianaPunJAb

ChandigarhuTTRAKhAnd

Goa

mumbai

Kochi

delhi

Kolkata

Pune

Chennai

hyderabad

mangalore

Jodhpur

Surat

hARyAnA

RAJASThAnuTTAR PRAdESh

bIhAR

JhARKhAnd

SIKKIm

WEST bEnGAl

ORISSAChhATTISGARh

mAhARAShTRA

mAdhyA PRAdEShGuJARAT

AndhRA PRAdEShGOA

KARnATAKA

TAmIl nAduKERAlA

mEGhAlAyA

ASSAm

ARunAChAl PRAdESh

nAGAlAnd

mAnIPuR

mIzORAmTRIPuRA

bangalore

Paradip

Tuticorin

Kandla

Ennore

East-West Corridor

north-South Corridor

Golden Quadrilateral

International Airport

domestic Airport

major Sea Port

22 India30, 2008

As anyone who has conducted business in India is likely to agree, there are a myriad of risks that one needs to be aware of. The risk profile of each of India’s cities can vary considerably based upon a variety of elements. For the purpose of our analyses, we have grouped these elements into three broad categories: market risk, political & social risk and environmental risk.

Market RiskIn order to gauge market risk at a city level, we have used real estate transparency as a proxy for real estate risk. Jones lang laSalle has been measuring real estate transparency across the globe for a number of years. We have adapted our Global Transparency Index for the India market, and using a survey of market experts, have scored cities based on the following criteria:

1 availability of market information2 planning and building codes3 availability of public records4 property rights

All cities were graded from “A”, indicating the highest level of transparency in India, through to “E”, which indicates the most opaque markets.

Predictably, Tier I and Tier II cities all scored in the top two transparency grades. Of greater surprise was that a few Tier III cities also scored in the top grades – notably Chandigarh, Kochi and nagpur.

Assessing Risk

Fig 26: Real Estate Transparency


Fig 25: LEED Certified & Registered Projects

Source: Indian Green building Council

India308%

Tier 1 Cities52%

Tier 2 Cities40%

Highest A Chandigarh, delhi, Kolkata, Pune

B bangalore, Chennai, hyderabad, Kochi, mumbai, nagpur

C Ahmedabad, Coimbatore, Indore, Jaipur, ludhiana, nashik, Thiruvananthapuram, Vijayawada, Visakhapatnam

D Amritsar, bhopal, bhubaneshwar, Goa, Jalandhar, Jodhpur, mangalore, mysore, Vadodara

Lowest E Agra, Allahabad, Guwahati, Kanpur, lucknow, meerut, Patna, Surat, Varanasi

India has shown consistent improvement in market transparency over the past 6 years. Amongst Indian cities, a few Tier III cities (Chandigarh, Kochi & nagpur) score in the top grades

Fig 24: Rapid Transit Systems (Existing or Planned)


Metro Bus

delhi ✓ ✓

mumbai ✓

bangalore ✓

Chennai ✓

hyderabad ✓

Kolkata ✓

Pune ✓

Ahmedabad ✓ ✓

bhopal ✓

Indore ✓

Jaipur ✓

Kochi ✓

Patna ✓

Tier

ITi

er II

Tier

III

India30, 2008 23

We also observed a correlation between transparency and levels of real estate activity across all three real estate sectors (office, retail and hotels). Cities which had higher levels of transparency also tended to have more active real estate markets.

however, having a low level of market transparency doesn’t necessarily preclude a city from having high real estate activity within a single sector. While Goa and Jaipur did not score particularly well in our Transparency Index, they do have the highest hotel market activity. The same holds true for ludhiana (retail) and Thiruvananthapuram (offices).

On a national level, India has shown consistent improvements in market transparency over the past six years.

In Jones lang laSalle’s 2008 Global Real Estate Transparency Index, India’s prime markets ranked 50th out of 82 markets globally. The same survey revealed relatively narrow differences in transparency levels between India’s Tier I, II and III cities, particularly when compared to differences within China. This bodes well for India’s smaller cities which are looking to lure international investors, developers and occupiers away from the major metros.

Political & Social RiskWhile many opportunities are available across Indian real estate markets, India’s political and social landscape is a blend of diverse ideologies, religions and cultures. despite offering a more stable environment for business and investment than other South Asian countries, India is not immune to the political upheaval, terrorist activities and economic strikes that are found within the region.

Corruption, an issue that continues to be a hindrance to economic and social development across the country, is being fought by governments on both state and national levels. These efforts are yielding various levels of success with the states of Andhra Pradesh, Chandigarh, Punjab and maharashtra being noted by Transparency International for having the most recent success.

24 India30, 2008

Environmental RiskEnvironmental risks in India are widespread and notlimitedtospecificregionsorcities.Poorinfrastructure and lax enforcement of existing building codes and pollution standards often serve to compound existing problems. Earthquakes,floodingandpollutionaresomeofthe leading environmental issues that India faces.

The subcontinent is a seismically active region. 25 of the 30 cities in our survey sit in a seismic activity zone of moderate to high levels. While construction codes in India do require builders to employ earthquake resistant technology in their projects, these laws are not effectively enforced. The situation is expected to improve as international investors and occupiers demand better compliance from the pan-national and international developers who are taking up projects in Tier III cities.

The monsoon rains, vital for India’s agriculture and power generation, can also wreak havoc in both rural and urban environments. Even large metropolises such as mumbai lack the infrastructure to cope with this recurring phenomenon, leading to productivity loss each season.

Pollution of India’s air and water is becoming an increasing concern. As consumer purchasing power rises and the price of automobiles falls, more and more Indians are purchasing their first automobile. The resulting air pollution and traffic is reaching alarming levels, particularly in smaller cities which do not currently have adequate public transit systems. While only six cities have an existing or planned bus rapid transit system, four of these are India30 cities. Conversely, mass rapid transit systems (metros) can be found in six of the seven Tier I and Tier II cities, but only in two of the India30 cities.

Sustainability initiatives are gaining traction in India, and the green building movement, while small, is steadily growing. There currently exists over 500,000 sq m of green building space in India with an additional 10 million sq m estimated to be under construction or awaiting certification.

India’sfirstgreenbuildingwasdevelopedin2001.Sincethen,thenumberofregisteredandcertifiedgreen buildings in the country has steadily increased. It is encouraging to see that while only 3%ofLEEDcertifiedgreenbuildingscurrentlyexistoutsideofTierIandTierIIcities,thisfigureisexpected to rise up to 8% as registered projects located in 11 Tier III cites (six of which are in the India30)becomeLEEDcertified.

Fig 27: Seismic Zones in India

Source: Geological Survey of India

Thiruvananthapuram

Ahmedabad

Hyderabad Vishakhapatnam

Lucknow GuwahatiJorhat

Kolkata

Chennai

Srinagar

Mumbai

JaipurDelhi

Bhuj

Zone I (Least Activty)Zone II (Low Activity)Zone III (Moderate Activity) Zone IV (High Activity)Zone V (Highest Activity)

Kerala backwaters

India30, 2008 25

ChandigarhChandigarh was one of the first Tier III cities to be on the radar screen of occupiers, developers and investors in India. The city, which was first recognized by World Winning Cities in 2005 for its growth potential, is the only Tier III city to score an A rating in our India Transparency Survey.

With only 114 sq km of total area, the union territory of Chandigarh functions as a municipality within itself, one that is friendly to business and real estate investment. Possessing

some of India’s best infrastructure and being in close proximity to delhi have helped Chandigarh attract keen interest from domestic and international investors.

While the growth of the city has been challenged in recent times by other tertiary markets such as Jaipur and Kochi, Chandigarh continues to have a robust economy with corporates such as Infosys, TCS, dell, Ibm daksh and Intel all having a major presence.

Chandigarh Technology Park, Chandigarh

26 India30, 2008

Economic development and real estate activity has to date been strongly concentrated in India’s largest metros. Going forward, however, Tier III citiesareexpectedtoreapgreaterbenefitsandplay a larger role in India’s growth story. The attractiveness of these tertiary markets will grow as increasing labour costs and real estate costs continue to erode the appeal of larger metros.

Inevaluatingthegrowthpotentialoftheofficesector in the India30, we have examined a variety offactorsincludingofficespaceaffordability,availability of human capital, connectivity and overall attractiveness for the IT/bPO sector.

Thetop10citieswiththestrongestofficemarketpotential include several cities that already have an activeofficemarket,suchasChandigarh,Kochi,nagpur, Thiruvanathapuram, Jaipur and Ahmedabad. It also includes a number of locations thatarenotyetontheradarofmostofficeoccupiers.bhubaneshwar, mysore, Coimbatore, and mangalore all have low levels of current activity, suggesting that these cities are now poised for lift off.

Cities from each region of India are represented in our top spots. Coimbatore, Ahmedabad, Goa, MangaloreandBhubaneshwarbenefitedfromhighlevels of affordability. With the exception of mysore, all cities are well connected with an international or domestic airport. Southern cities were buoyed by large talent pools as was Ahmedabad. Jaipur, which is traditionally recognized as a tourist destination, demonstrated that it has the right mix of ingredients tosupportarobustofficemarket.

The cities with the strongest potential differ considerably in their levels of market maturity. Ahmedabad and Chandigarh are the most mature withinthegroupandhavelarge,diversifiedlocaleconomies that drive their commercial real estate markets. Jaipur, Kochi and Thiruvananthapuram follow, with robust local economies and a growing occupier base. Other winners such as bhubaneshwar, nagpur, Coimbatore, mysore and mangalore exhibit solid potential but are still primarily driven by cost.

When market transparency is overlaid upon sector potential, three clear winners emerge – Chandigarh, Kochi and nagpur. While these more establishedofficemarketsdonotnecessarilyofferthe strongest growth potential among the India30, theydopresentmarketsofsignificantsize,offereconomies that are robust and provide relatively stable environments for real estate development.

Future Hotspots – Offices

Fig 28: Office Market – Future Hotspots


Score

Low High

Thiruvananthapuram

Mangalore

Mysore

Coimbatore

Nagpur

Chandigarh

Jaipur

Bhubaneshwar

Kochi

Ahmedabad

As India’s economy and real estate markets continue to develop, Tier III markets are expected to play a greater role

Fig 29: Office Sector Opportunity Map


Transparency

Lowest Highest

bhubaneshwar AhmedabadJaipur

Kochinagpur Chandigarh

Suratmysore

mangaloreGoa

CoimbatoreThiruvananthapuram

Visakhapatnam

lucknowKanpur

Agra

Vadodarabhopal

VijayawadanashikIndore

ludhiana

Allahabadmeerut

VaranasiPatna

Guwahati

JalandharAmritsarJodhpur

Lowest Potential – Highest Risk

Lowe

stHi

ghes

t

Offic

e Pot

entia

l

Highest Potential – Lowest RiskIndia30, 2008 27

Growth in the retail sector in India’s Tier III cities is being fuelled by rising incomes, favourable demographics, changing attitudes toward spending and increasing brand awareness. many Indian and international retailers already have a well-established presence in several Tier III cities and will continue to look for additional markets as they expand their operations over the long term.

not all Tier III cities will be able to absorb a high level of new retail activity. Smaller markets will become quicklysaturatedandretailerswillbeseeking“firstmover advantage”. Even larger Tier III cities will eventually become saturated, forcing retail developers and retailers to focus on operational issues (mall management) and product differentiation (luxury malls, discount malls, and other formats).

An evaluation of retail potential among the India30 has taken into account the size and spending power of each city’s consumer base, economic growth, levels of hypermarket activity and retail momentum. The analysis has identified some predictable winners such as Chandigarh, Kochi, Jaipur and lucknow, but also includes less familiar cities, such as Surat in the state of Gujarat.

The Gujarati cities of Ahmedabad, Vadodara and Surat have taken three out of the top ten spots in terms of retail potential. Their strong potential is driven by a combination of large market size and solid economic growth. both Ahmedabad and Surat are flush with consumers with high levels of disposable income, as demonstrated by the large number of households in the SEC A and b categories found in those cities. Surat, the capital of India’s diamond industry, has a relatively large population of affluent consumers. Ahmedabad has more SEC A & b households than the Tier II cities of Pune and hyderabad. despite the short term correction that will play out in Ahmedabad’s retail sector, we feel this market is a clear long term winner.

Chandigarh, already well established as a retail hub, scores well due to its high levels of per capita expenditure, representing the highest in India. The city is a top destination for international retailers due to its high level of brand awareness. despite the price correction that is being witnessed in this market, demand from retailers and transaction levels in the market remain strong and will do so in the medium term.

Kochi and Visakhapatnam, cities with relatively small consumer bases, scored well across all measures, pointing to robust retail markets. Vijayawada, a slightly smaller consumer market, has also begun to attract brands and organized retail players into its steadily growing retail market.

Fig 30: Retail Market – Future Hotspots


Score

Low High

LucknowJaipur

ThiruvananthapuramVadodara

AhmedabadVijayawada

VisakhapatanamKochiSurat

Chandigarh

Future Hotspots – RetailRetail sector growth in Tier III markets will remain strong, but not uniform. Operational issues and product differentiation will play an increasingly important role

dlF mega mall, dlF City, Gurgaon

28 India30, 2008

India has an acute shortage of hotel accommodation, with a current estimate of only 31,400 rooms in 5-star and 5-star deluxe hotels across the whole of the country. The sector has huge growth potential supported by both leisure and business demand. Forecasts by the World Travel and Tourism Council point to the travel & tourism industry in India growing by an average of 7.6% per annum over the coming 10 years. Furthermore, WTTC ranks India #1 out of 176 countries in terms of projected growth in demand for travel and tourism. India has so far failed to exploit its massive tourism potential attracting only 0.5% of world tourists and taking in only 0.9% of international tourism receipts. however, this situation is likely to improve as the international marketing campaigns by India’s ministry of Tourism, as well as those by several states, continue to increase the number of tourists that visit the country each year.

A key driver for the hospitality sector will also be the growth in corporate demand. As India’s economic activity continues to grow in size and geographic spread into Tier III cities, demand from business travellers for rooms and mICE facilities will further drive development of the hospitality sector.

In evaluating the potential of the hospitality sector in the India30, we have factored in tourist attractions, tourism infrastructure development, convention centres, accessibility by air and rail, and local

corporate demand. Our analysis suggests that most cities are in the nascent stage of development and currently show low levels of potential.

Six cities stood out from the pack, each with a different leisure-corporate blend, and emerged as our future hotspots – Goa, Jaipur, Kochi, Ahmedabad, Agra and Thiruvananthapuram. In Goa and Agra, the hospitality sector will continue to be driven primarily by tourism and leisure. At the other end of the spectrum, the hospitality sector in Ahmedabad, with its diverse and robust local economy, will be largely supported by corporate demand. While tourism is the primary driver for the hospitality sector in Kochi, Thiruvananthapuram and Jaipur, all three cities have strong and dynamic economies and we expect business travellers to boost demand for hotel accommodation.

As a group, the India30 will provide opportunities in the hospitality sector for a diverse set of product offerings and formats. The six hotspots thatwehaveidentifiedinparticular,withtheirunique markets and demand drivers, will offer products that cover the entire spectrum of hospitality products and services. The remaining 24 markets, some of which also scored highly in our analysis, will be able to capitalize on niche opportunities such as budget hotels, particularly in cities where domestic tourism is strong.

Future Hotspots – Hotels

Fig 31: Hotels Market – Potential vs. Supply


Allahabad

Indore

Kanpur Ludhiana

MangaloreMeerut Nashik

Vijayawada Supply

Poten

tial

High

Low High

AgraJaipur

GoaKochi

Thiruvananthapuram

Chandigarh

Guwahati BhubaneshwarVisakhapatanam

AmritsarAhmedabad

Lucknow

Jodhpur

JalandharVaranasiSuratNagpur

CoimbatoreVadodaraMysoreBhopal

Fig 32: Hotel Hotspots – Key Drivers


While corporate demand is projected to increase over the long term, the hospitality sector will continue to be fueled by tourism and leisure

● India’s most popular leisure destination

● high number of resorts and convention centres

● Serves as the gateway to tourism in Kerala

● Growing corporate demand

● International airport that handles more international passengers than any other India30 city

● Seaport upgrades include new international cruise ship terminal

● Part of India’s Golden Triangle tour circuit

● International airport

● Well connected by luxury and long distance trains

● local attractions drive religious tourism

● Growing corporate demand

● International airport

● home to India’s most famous tourist attraction – the Taj mahal

● highest number of convention centres outside of mumbai and delhi

● Part of India’s Golden Triangle tour circuit

Goa

Koch

iJa

ipur

Thiru

vana

ntha

pura

mAg

ra

India30, 2008 29

Closing ThoughtsWhile Tier III cities currently account for a relatively small share of India’s real estate market, this scenario is bound to change as India’s economy continues to grow and be more widely dispersed. While in general Tier III cities will stand to benefit from this economic development, these markets will not grow uniformly. Rather it will be those cities, led by proactive governments which invest in infrastructure and education, that will be best positioned to succeed. Tier III cities which simply rely on cost savings (relative to India’s major metros) will not be doing enough to ensure future long term growth.

From an examination of future potential across a combination of office, retail and hotel sectors together with an assessment of risk profiles, we short-listed 10 cities which we believe offer the most robust opportunities.

The first group of 5 cities – Ahmedabad, Chandigarh, Kochi, Jaipur and nagpur – already have rapidly growing real estate markets due to city size, market reach and connectivity.

The second set of 5 cities – Coimbatore, mangalore, Thiruvananthapuram, Visakhapatnam and Goa – are continuing to emerge as favoured real estate destinations amongst the India30 due to the unique aspects that they can offer – affordability, tourism and a rapidly developing consumer base.

Ourtop10citieshavedisparateriskprofileswithChandigarh, Kochi and nagpur scoring the same risk levels as India’s Tier I and Tier II markets. The remaining eight cities, while possessing slightly higher levels of risk, should not be ignored as opportunities continue to abound there for those savvy enough to understand the unique dynamics of these markets.

Technical NotesMethodology & DefinitionsCommercial Space Affordability Index – relative affordability for Grade A commercial space (or closest substitute in smaller markets) that is calculated as an average across all business districts that exist (primary, secondary and peripheral).

Connectivity Index – composite index based upon variables that measure a city’s air passenger volume (domestic and international), rapid transit systems, rail network density, rail halt stations, sea port access, connections to major highways and road corridors, and proximity to Tier I cities and other major metros.

Educational Institutes – count of institutes of higher education within a city including universities, research institutions, colleges (arts, science, commerce, teaching, engineering and architecture) and medical schools.

Hotel Market Activity Score – composite index based upon supply and demand indicators including presence of business class and luxury hotels, availability of labour, domestic and international tourists, domestic and international air travellers and demand from corporates.

Hotel Market Growth Potential – composite index based upon corporate presence, convention centres, tourist attractions, rail connectivity, air connectivity, presence of business class and luxury hotels, tourism services and tourism projects.

IT/ITES Penetration – based upon cumulative total of officepresenceofthetop109ITandITEScompaniesin India. Cities are rated as Strong (5+), Above Average (4–5), Average (3), below Average (1–2) and Weak (0).

Office Market Activity Score – composite index based upon supply and demand indicators including stockofGradeAoffice(orclosestsubstituteinsmallermarkets), corporate presence and labour employed.

Office Market Growth Potential – composite index based upon attractiveness rating to the IT/ITES industry, Commercial Space Affordability Index, Connectivity Index, and availability of skilled labour.

Real Estate Potential Score – composite index based uponOfficeMarketGrowthPotential,RetailMarketGrowth Potential and hotel market Growth Potential.

Real Estate Transparency – a measure of the degree of openness, accountability and communication in a real estate market. World Winning Cities has assigned each city a grade of A (highest, or most transparent) through E (lowest, or least transparent) as determined by the results of a survey of real estate and investment experts.

Retail Market Activity Score – composite index based upon supply and demand indicators including presence of quality shopping malls & shopping centres and presence of key retailers of apparel, food & beverage and entertainment.

Retail Sector Growth Potential – composite index based upon socio-economic fundamentals and indicators of organized retail including population, per capita income, per capita savings, per capita expenditure, socio-economic classification (SEC A & b), GdP growth, and presence of hypermarkets, shopping malls & shopping centres, and key retailers of apparel, food & beverage and entertainment.

Socio-Economic Classification (SEC) – used to group households based on education and occupation of the chief wage earner with levels A & b considered high, level C considered mid-level and levels d & E being considered low.

AbbreviationsBFSI Banking,financialservices&insuranceIT Information technologyITES Information technology enabled servicesMNC multi-national corporationREMF Real estate mutual fundSEBI Securities and Exchange board of IndiaSEZ Special economic zone FOREX RatesAs of September 30, 20081 uSd = 46.9400 InR1 InR = 0.0213 uSd

1 uSd = 0.5617 GbP1 GbP = 1.7804 uSd

Cities with proactive governments which invest in infrastructure and education are best positioned to succeed

30 India30, 2008

Sources: Jones lang laSalle, Indicus Analytics Pvt. ltd., Airports Authority of India, and Planning Commision, Government of India

India 30 – Comparative DataAirports

# City State Population (000s, 2006)

Income / Capita (USD, 2006)

GDP Growth (% pa, 2007–2008)*

Transparency Transaction Costs

(Stamp Duty)

International or Domestic

Total Passengers (2007–2008)

1 mumbai maharashtra 20,924 $1,184 13.58% b 5.0% International 25,864,753

2 bangalore Karnataka 6,761 $1,693 13.37% b 8.5% International 10,120,621

3 delhi national Capital Territory 16,029 $1,261 nA A 8.0% International 23,971,662

1 hyderabad Andhra Pradesh 6,550 $1,340 6.55% b 9.0% International 6,985,048

2 Pune maharashtra 5,167 $1,405 13.58% A 5.0% International 1,679,409

3 Chennai Tamil nadu 8,219 $1,328 11.88% b 8.0% International 10,659,754

4 Kolkata West bengal 15,736 $976 13.50% A 6.0% International 7,458,932

1 Agra uttar Pradesh 1,873 $662 10.76% E 10.0% domestic nA

2 Ahmedabad Gujarat 5,310 $1,340 13.28% C 4.9% International 3,163,647

3 Allahabad uttar Pradesh 1,336 $1,006 10.76% E 10.0% domestic nA

4 Amritsar Punjab 1,481 $1,272 2.67% d 6.0% International 677,768

5 bhopal madhya Pradesh 1,739 $1,219 9.78% d 8.5% domestic 218,359

6 bhubaneshwar Orissa 996 $855 2.91% d 5.0% domestic 702,199

7 Chandigarh Chandigarh 960 $2,330 nA A 6.0% domestic 229,608

8 Coimbatore Tamil nadu 1,820 $1,119 11.88% C 8.0% International 1,062,315

9 Goa Goa 798 $1,815 12.00% d 2.0% International 2,578,248

10 Guwahati Assam 979 $1,768 9.12% E 15.0% International 1,347,485

11 Indore madhya Pradesh 2,076 $1,046 9.78% C 8.5% domestic 548,711

12 Jaipur Rajasthan 3,120 $1,284 8.37% C 6.0% International 1,339,391

13 Jalandhar Punjab 1,097 $1,609 2.67% d 6.0%

14 Jodhpur Rajasthan 1,103 $1,125 8.37% d 6.0% domestic nA

15 Kanpur uttar Pradesh 3,371 $815 10.76% E 10.0% domestic nA

16 Kochi Kerala 1,524 $1,829 13.55% b 6.0% International 3,344,124

17 lucknow uttar Pradesh 2,693 $1,334 10.76% E 10.0% International 716,585

18 ludhiana Punjab 1,972 $1,336 2.67% C 6.0%

19 mangalore Karnataka 858 $1,334 13.37% d 8.5% International 713,667

20 meerut uttar Pradesh 1,679 $739 10.76% E 10.0%

21 mysore Karnataka 1,076 $1,375 13.37% d 8.5%

22 nagpur maharashtra 2,984 $1,047 13.58% b 5.0% International 851,651

23 nashik maharashtra 1,550 $798 13.58% C 5.0% domestic nA

24 Patna bihar 2,374 $839 8.70% E 10.4% domestic 387,303

25 Surat Gujarat 3,991 $1,214 13.28% E 4.9% domestic nA

26 Thiruvananthapuram Kerala 1,146 $2,176 13.55% C 6.0% International 2,101,904

27 Vadodara Gujarat 1,835 $1,893 13.28% d 4.9% domestic 501,744

28 Varanasi uttar Pradesh 1,372 $677 10.76% E 10.0% International 448,863

29 Vijayawada Andhra Pradesh 1,337 $1,124 6.55% C 9.0% domestic nA

30 Visakhapatanam Andhra Pradesh 1,644 $1,368 6.55% C 9.0% domestic 502,194

Tier

ITi

er II

Tier

III (I

ndia3

0)

* State-level estimates using current prices

India30, 2008 31

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COPyRIGhT © Jones lang laSalle IP, InC. 2008This publication is the sole property of Jones lang laSalle IP, Inc. and must not be copied, reproduced or transmitted in any form or by any means, either in whole or in part, without the prior written consent of Jones lang laSalle IP, Inc. The information contained in this publication has been obtained from sources generally regarded to be reliable. however, no representation is made, or warranty given, in respect of the accuracy of this information. We would like to be informed of any inaccuracies so that we may correct them. Jones lang laSalle does not accept any liability in negligence or otherwise for any loss or damage suffered by any party resulting from reliance on this publication.

december 2008

Mr. Anuj PuriChairman and Country headmumbai+91 22 2482 [email protected]

Mr. Sanjay DuttChiefExecutiveOfficer–businessmumbai+91 22 2482 [email protected]

Mr. Deepak Bhavsarmanaging directorStrategic Consulting & landnew delhi+91 11 4331 [email protected]

Mr. Avinash MirchandaniProgramme managerWorld Winning Citiesmumbai+91 22 6658 [email protected]

Mr. Jeremy KellyProgramme director World Winning Citieslondon+ 44 (0)20 3147 [email protected]

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Research India 30 Real Estate Opportunities in Tier III Cities