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Is the Bangalore Story Over? Bad News for Serviced Apartments? (Write up prepared during the period Oct 2007- Jan -2008. Published on Feb- 2008) Challenges Faced by Bangalore Serviced Apartments Industry Service Apartments in Bangalore Challenges Ahead. *** Investment Prospects in Bangalore Serviced Apartment Business. *** Hospitality and Accommodation in Bangalore. *** Hotel Appartments & Corporate guest houses Bengaluru, Karnatka, India. High Attrition Rates in Bangalore Software Industry and Escalating Real Estate Price. How will this affect prospects of Serviced Apartment Business in Bangalore? It is obvious that the high prospects of Bangalore Service Apartment Industry is linked to the prospects of Software and BPO industry in Bangalore. Bangalore is the IT capital of India and the outsourcing hub of the west. But there are a few factors that could threaten this position in the long-run. One is increasing costs in India, due to rising salaries and rents. Another factor is the poor state of infrastructure and the lack of sufficient telecommunications facilities. As costs rise, other locations begin to become more attractive to foreign investors and foreign clients, especially if the type of work that is being done in India can easily be done in other locations. This is going to pose a serious problem for firms in India that export the lower value-added types of software development activities such as basic programming, coding and testing. [1] There are two things which creates problem for IT business in Bangalore. One is the high attrition rate and high real estate price in Bangalore. Because the IT business is using the cheaper labour in the local market and provide service to USA or European market the price difference is very vital for the software export business. Over the years, the salary of the IT professionals have gone up many folds. It is reported that though at the entry level still there is a high difference exist between the salary scale of Bangalor IT professionals and that of USA, at senior IT managers's level, the salary difference is not very high. To add to this, the high level of attrition rates worries the IT companies in Bangalore. And over the years other IT hubs emerged pausing a challenge to Bangalore. Today we have Chennai, Hydarabad, Pune, Calcutta and even new destinations like Cochin, Mysore, and Trivandrum all coming up as new IT destinations, with large number of IT professionals available for a relatively low price and the Real estate price also is very low in such destinations. ----------------------- References: 1 US Dollar Depended Export Market. - How does this pose Challenge and Opportunity to Bangalore Service Apartment Business? Unlike Mumbai or Chennai, where there is a diverse nature of industries, Bangalore is mainly depended on export revenue, especially software (US $ 1.6 billion), BPO, BioTech, Apparel( $714.28 million), processed food products (US $ 408.16 million) industries. (Data could be a little old).[1] Due to the appreciation of Rupees all these industries are in crisis. The plantation and agrarian segment in Karnataka are already in crisis. Powerloom, Silk, export oriented farming etc were facing big challenge earlier itself in the rest of Karnataka. As most of the public sector electronic hardware industries were systematically neglected, the only one area, where Bangalore is still leading, and unchallenged, is professional educational institutions. ----------------------- References: 1 Recession in USA and its impact on Hospitality and Service Aparment Sector Collapse of housing market in USA and its impact-- The biggest concern is the slow down of USA market. Any slowdown of Bangalore Software industry will have its negative impact on Hotel and Service Apartment industry. Already we have been hearing about the stories of sub-prime mortgage crisis and its impact on the finance market. It is said that consumer confidence in USA is very low and the fundamentals are very weak and it is only a matter of how long it will take before the recession hit hard on USA market. As the global market is now integrated any slow down in the USA market will hit hard the software export. Though, there is a line of thinking that when the USA get into recession more and more USA companies will start outsourcing and that will only benefit the Indian economy. However, the recession will not immediately trigger a large number of new companies start outsourcing. And when overall recession hit the global market, it will only pull Indian market down, at least for a few years. This will definitely a bad news for Service Apartment industry. ----------------------- References: 1 The Appreciating Rupee. - Challenge to Bangalore Service Appartment. The appreciation of rupees is already creating a lot of heart burns. And All export oriented industries are going through a tough time. IT companies' margin has hit in a big way and already IT companies have decided to cut down unnecessary expenses. Also they have taken decision to cut the yearly salary increment rate of their executives. When companies decide to cut down the expenses, that will be a bad news for the other industries, including Hotel and Service Apartment industry, as there will be less liquidity in the market. However, this may also prompt the Corporate to prefer Service Apartments to Star Hotels. ----------------------- References: 1, 2, 3 Large Number of Hotel Rooms & Serviced Apartments Added in Bangalore Market. In the last few years, large number of Hotel rooms and Service Apartments are added in Bangalore, and the commercial business travellers are not expected to go high in the same rate. Bangalore today has about 4,500 Hotel Rooms across all categories. There has been a 20 per cent increase (about 450 rooms in five-star hotels) across hotels in Bangalore in the year 2007.[1] Five more Hotels are expected to be completed by the end of 2008-09 financial year. This means about 675 rooms being added to the existing stock over the next 12-14 months. Market correction has begun at the top-end of the market, which witnessed a 10-12% drop in ARRs this fiscal year. ARRs are expected to slide from the current levels in the next fiscal, owing to the increase in supply.[2]This will also result a correction in the Service apartment rates and also in the occupancy rate. ----------------------- References: 1 , 2 STPI tax Benefits End in year 2009 (However the STPI Tax Holiday is extended till March 2010. [3] - Note Added on 10th Oct, 2008.) Another factor which may have an impact on the IT business and Service apartment busines is that the STPI tax exemption period ends at March 2009. [1],[2] Though new SEZ may come up where new TAX subsidies are provided, it is almost sure that the number of newer and smaller companies coming up to start software business, where already stiff competion exist will be relatively low compared to past. Hence we have a scenario, where, unlike in the past, in the accommodation service business, demand side growth rate is lower compared to supply side growth rate. ----------------------- References: 1, 2 , 3 New Airport- Pressure on South Bangalore IT Hub would Come Down New airport- The new Airport is getting completed and the first flights will take off from the Devanahalli Airport shortly. Nevertheless, the infrastructure in and around this new airport and the connecting road facility to the Old Bangalore is not yet ready and may take several years. However, once the Airport and the connecting roads are completed, it will definitely take away pressure from the South Bangalore IT hub as more and more new companies will start in the North Bangalore, closer to the new Aiport. This, obviously, in the medium and long term, give generate less demand for the existing Service Apartments which are concentrated in the South and Central Bangalore. ----------------------- References: 1

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