The bifurcation of Andhra Pradesh and the highly publicised plans to build a fancy new capital have stoked expectations among entrepreneurs about investment prospects in Vijayawada and its hinterland, where Amaravathi is to come up.
But when investors, particularly those not in the league of mega corporations but in the small entrepreneur class, get down to the nitty-gritty of doing business in the new State, the one forbidding factor they have to contend with is the price of land and high retail rents. An overheated realty and rental market has erected formidable entry barriers for most of these entrepreneurs.
Setting up a hospital, hotel, fashion boutique or retail outlet in the capital area or in Vijayawada, which is to be the sister city of Amaravathi, requires entrepreneurs to set aside a major chunk of their capital to buy a piece of land or rent it. That skews the business model and makes the gestation period far too long.
Sensing juicy opportunities in the new capital region, a premium car dealer from Hyderabad wanted to set up a new dealership here. With land not being available in the core of the city, he scouted the fringes. He shortlisted Gannavaram, Poranki, Penamaluru, Undavalli, Nunna and other outskirts of Vijayawada, which are within a radius of 15 km from the city centre. He was taken aback by the land prices quoted to him: Rs. 5 crore to Rs. 7 crore per acre. Those are the kind of prices you hear about in metropolises like Hyderabad, Chennai and Bengaluru.
But what kind of sales could he expect for an investment like that? An average car dealership in the heart of Vijayawada would be happy to sell about a dozen cars a month. Realising that the return on his investment would be way too low, the dealer backed out of the project.
That is the experience of thousands of small investors, the class of entrepreneurs that can be counted on to generate thousands of accessible jobs for the people in the new State. With land prices soaring by the month, investing Rs.15 crore on a two-acre plot to build a business would lock up 35-40 per cent of an investor’s capital even before operations are launched. “That would mean that my monthly revenues have to be more than Rs.15 lakh (calculated at 12 per cent interest per annum). And I’ve not even factored in power bills, maintenance, employee salaries, taxes and miscellaneous expenditure. It’s just not viable,” says the dealer. “I could invest that kind of money in Hyderabad and have access to a bigger market,” he says.
The truth is commercial space in the heart of Vijayawada, a town of 1.2 million, is as costly as in some of the swank business districts of Hyderabad (population 6.5 million). In Hyderabad’s Banjara Hills, for instance, you might get to lease commercial space for Rs. 150 per sft. In Vijayawada’s Bandar Road, owners quote an equivalent price.
Similar are the travails of entrepreneurs from other sectors as well. Vijayawada is evolving into a medical hub and would like to promote medical tourism. Managements planning to establish hospitals here are, however, forced to think twice.
The fact is Vijayawada and Amaravathi have priced themselves right out of the investment market. In potential sectors like healthcare, education, retail, automobiles, entertainment, etc., the sectors that will create the most jobs, the potential revenues do not justify the high entry costs. For instance, establishing a super-speciality hospital offering cardiac, neuro, ortho and other services would cost Rs. 50 to Rs. 75 lakh per bed in Vijayawada. A comparable facility in Hyderabad would cost roughly Rs. 5 lakh less.
Even if an investor were to brave such entry costs, there are plenty of operational challenges. For instance, trained manpower such as technicians, nurses and expert doctors is just not available in Vijayawada. “As an alternative, I would have to spend a lot of money to get a senior cardiac or a neurosurgeon from Hyderabad or Chennai to work here,” says Dr. P. Ramesh Babu, managing director of Ramesh Hospitals.
It’s no surprise, therefore, that not many premium hospitals have yet announced plans for Vijayawada. In fact, as P. Ravi Kiran, chief financial officer of Vijayawada’s Ramesh Hospitals says, many investors are looking at Raipur and Bhubaneshwar, as the land values there are much lower. “Only entrepreneurs who acquired land here a few years ago when prices were much lower can set up hospitals here. At this juncture, it is tough to get to breakeven point given present volumes.”
As for smaller entrepreneurs, they have been shut out of the market already. “With the investment required for setting up a 6,000 sq ft restaurant here, I could set up a much bigger restaurant in Hyderabad or Visakhapatnam. More space means more business and more business means faster returns. At the end of the day, that’s what matters,” says the owner of a premium restaurant that launched a branch in Vijayawada last week.
Even local businessmen have been left breathless by the real estate frenzy in this region. “The key is rental values,” says Samana Moosavi, CEO of Samana Institute, a fashion design school. “When fashion design institutes or boutiques are mushrooming in Hyderabad, why are they not coming up here? That’s because rentals have gone through the roof and the returns are way too low.
Till three years ago, office space in a commercial complex on Bandar Road used to be Rs. 25 per sft. Today, it is Rs. 65 to Rs.75. And a fashion boutique cannot just operate anywhere; it has to be located in the business district. But the rentals are impossible to work with,” she says.
Even paan shop owners feel the pinch. Tirupatiah, who has a tiny shop on Bandar Road, says he pays a daily rent of Rs. 250 and paid an advance of Rs.1 lakh for the shop. “I have to be open 14 hours a day just to keep my head above water.”
