Tier-II and tier-III cities are staging their real estate comeback, says Anuj Puri
After a protracted period where interest for real estate investment was concentrated primarily in the larger cities, we are now seeing a resurgence of the tier-II/ tier-III cities story
in India. Many of these cities are seeing increasing economic activity and infrastructure growth, to some extent reducing the outward migration to the metros. This is a welcome dynamic that will eventually result in a more uniform spread of real estate demand across the country, and reduce the pressure on the larger cities.
What lies beneath?
The ticket sizes for residential properties in tier-II and tier-III cities and towns start from a significantly lower base, owing to cheaper land prices and also the fact that developers active there are more aligned with affordability. Buyers tend to be more cost-sensitive as economic drivers in the city may not be on par with those in the larger cities. Also, under the incumbent Government, many of these cities are now seeing significant infrastructure deployment. Quite a few have come under the Smart Cities programme, which bodes very well for their real estate markets. With increasing demand, one can expect prices in these cities and towns to assume a gradual upward trajectory. Price growth will be higher and faster in cities coming under the Smart Cities programme. This would indicate that intending buyers should not delay their purchase decisions indefinitely, since the lower existing base currently provides the ideal entry point, especially for price-sensitive buyers.
Whether a smaller city offers good options for investment depends on what economic drivers are already in place and which are expected in the short-to-mid-term. Definitely, accelerated infrastructure activity in a particular city or town indicates that price growth will be healthy going forward. Investors need to study each market for its growth prospects, including rental demand and capital appreciation trends as well as expected employment growth. A number of larger players have now expanded into tier-II and tier-III cities on the back of increasing demand for quality residential offerings there.
Investors will always be driven by investment rationale, as well as their own knowledge and preference of some markets over others. Investors with better capitalization may wish to focus on
the larger cities, depending on their risk appetite, while others would be more interested in India’s reviving tier-II/ tier-III story. Not all tier-II and tier- III cities are performing uniformly well, though it is true that supply will generally follow demand.
In other words, cities which are performing well economically will attract more migrant population, which will need rental housing. Simultaneously, local home buyer sentiment will also be higher in such a city. Both investors and end-users would have a very decent inventory to choose from, which enables them to fine-tune their final choices according to location, amenities
and ticket sizes. At the end of the day, end-users will purchase homes in their cities of residence – or, in the case of NRIs, in their cities of origin. Investors obviously have a much larger playing field. Smaller cities where residential property prices are significantly lower than in the top cities include Ahmedabad, Indore, Coimbatore, Chandigarh, Jaipur and Kochi. These cities also hold considerable growth potential due to their key growth drivers.