Expansion of real estate in Tier 2 markets


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Residential real estate has witnessed a massive transformation over the past couple of years. An interesting trend that has evolved in all these years is the shift in the homebuyer’s preference towards suburbs and smaller cities for investments in residential real estate. Consequently, cities such as Chandigarh, Nagpur, Kochi, and Indore have come under the purview of the end-users. Here are some of the factors behind the emergence of Tier 2 cities as the hotspot for real estate investments in India.

The Indian real estate market was once primarily driven by the major metropolitan and urban regions of the Nation such as Delhi, Mumbai, Bangalore, Hyderabad, and Kolkata. But, the infrastructure of the major cities is already encumbered now, and the developers are looking forward to expand their horizon in the Tier 2 markets. Consequently, many of these cities are witnessing increased economic activities and a reduction in the outward migration to the metros.

L C Mittal, Director, Motia Group, in this context, avers, “Smaller cities now have investment-grade retail assets that can generate good returns. Apart from Delhi NCR, Amritsar, Ahmedabad, Indore and Chandigarh are a few cities that might witness increased traction in the times to come. With the movement of offices, the residential segment has also gained momentum in these cities. A majority of the investors in these cities belong to Tier 1 cities. Long-term investments and high rental incomes are the two primary things that they look forward to."

Mentioned below are some of the major contributors to the growth of real estate in tier II cities.

  • Low cost of construction and other factors: Constructing a home in Tier 2 cities is cheaper than construction a similar unit in a Tier 1 city. The land prices and the cost of materials in these cities are comparatively lower than the metro cities. Additionally, owing to the easy availability of skilled labour, the development of housing units is a lucrative proposition for the developers in Tier 2 markets. Subsequently, this also brings down the prices of residential accommodation in these cities and, therefore, they are preferred by the investors and homebuyers alike. Viewed as excellent investment options, such cities are more cost-effective than metro cities where property prices touch the roof. Moreover, these are also considered to be ideal investment destinations by the Non-Resident Indians (NRIs) who usually prefer bungalows sprawling over large acres of land. For the developers, the return on investment in these cities is higher and stable in comparison to the metros. As per Prateek Mittal, Executive Director, Sushma Group, “The primary driver for real estate in Tier 2 markets is job creation. The other one is affordability. Smaller cities are now increasingly having good job market driven by IT and BPO firms, and thus, there is a steady demand for budget homes. With increasing sales in the Tri-City of Chandigarh, the residential segment has become favourable for investment purposes as it has been yielding good returns. The sector anyway has been witnessing an upsurge in investments made in Tier 2 and Tier 3 cities since 2015. Many private equity firms have been investing in the retail industry to diversify their investment portfolios in these cities.”
  • Industrial expansion: Owing to the availability of land and labour at affordable rates, several companies have stepped forward to shift their bases to Tier 2 cities. A plethora of real estate firms and IT companies are observing a shift to these cities due to reasons including walk-to-work culture, quality lifestyle, media exposure, availability of talent pool, an affinity for retail, lesser price expectations, and a conducive business environment created by the State government. With saturation in the economic growth and construction opportunities in the major cities of India, a large number of Tier 2 and Tier 3 cities have spelt success over the past few years. For instance, while Coimbatore, at present, houses more than 25,000 Small and Medium Enterprises (SMEs), Vishakhapatnam is a preferred destination for setting up mining and heavy manufacturing industries.  
  • Enhanced connectivity: Expensive transportation along with huge traffic and travel time are some of the common drawbacks associated with the metros. However, small cities tend to mitigate these disadvantages. As a matter of fact, improvement in connectivity has made these cities more accessible and hassle-free than the metros. International airports have been established in cities like Chandigarh and Amritsar. Additionally, metros are either proposed or are already present in cities such as Jaipur, Kanpur, Lucknow, Chandigarh, Pune, Kochi, Ludhiana, Bhopal, and Indore. With enhanced connectivity through flyovers, bypasses, expressways, metro, and industrial corridors, several reputed developers are now looking forward to marking their presence in the smaller towns. `
  • Government initiatives: With measures to upgrade the urban infrastructure which include the introduction of airports, upgradation of Mass Rapid Transit System (MRTS), and development of Special Economic Zones (SEZ), the Government has taken proactive measures to boost sentiment in the real estate market of these cities. The upcoming projects such as the Ahmedabad-Mumbai Bullet train project will further create employment opportunities for many and act as a catalyst behind the growth of industrial and commercial hubs around the infra project. In addition to this, the Government has also reduced the Goods and Services Tax (GST) rate for the affordable housing segment. The move intends to benefit the real estate sector and the prospective buyers in Tier 2 markets.  

Small cities comprising of the mid-income population are, at present, under-served in terms of quality retail and entertainment experiences. However, the population comparatively has a high propensity to spend. Keeping in mind the huge customer base, a large number of retailers are also looking beyond the metros to expand their operations in these cities. In the wake of all the factors mentioned above along with the changing market dynamics, it can be said that small cities will continue to thrive as preferred destinations for real estate investments in the times to come.

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