From dawdlers to front runners: Tier 2 cities on their way to lead the next growth wave

[ecis2016.org] The early signs of the economic growth spreading beyond the geographic extent of India’s top-eight cities have already been visible since the last decade through growing employment opportunities in the services sector, rising aspirations and consumption in the smaller cities. The on-going COVID-19 pandemic has further accelerated the growth in these cities on the back of hybrid work-culture, focus on larger and open spaces, and increase in use of technology, that has propelled the traction across sectors including residential realty.

In India, the top-eight cities, also known as Tier 1 cities, have been the economic epicenters of the country, as they possess the right mix of infrastructure and connectivity to attract the businesses and workforce from other urban and rural areas. In fact, the migration patterns, as per Census of India (2011), suggest that more than half of the population in these major cities come from other smaller cities. The economic pull of these areas is such that a quarter of India’s urban population is concentrated in the top-eight cities. However, the exponential growth has brought with it the issues such as exorbitant real estate prices, rising operational cost, traffic congestion and pollution amongst others.

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While Tier 1 cities continue to attract economic growth despite their woes, the Tier 2 and 3 cities have been stragglers and not been able to generate as much confidence and growth. Factors such as lack of economic anchor, connectivity and subpar social and physical infrastructure have acted as deterrents to growth in the smaller cities. However, in the recent past, there has been a shift in perception due to emphasis on decongesting the top-eight cities and stimulating growth in the small cities to create new economic nodes in the country.

Augmentation of infrastructure and connectivity put small cities on the map

Several policy initiatives for improving connectivity, infrastructure and developing a conducive business environment have been put in place for bringing the smaller cities on the radar of national and global businesses. Infrastructure and business friendly ecosystems are being developed under initiatives such as the Smart Cities Mission (SCM), Atal Mission for Rejuvenation and Urban Transformation (AMRUT), Pradhan Mantri Awas Yojna (PMAY), Special Economic Zones (SEZs) and industrial corridors, while Regional Connectivity Scheme – UDAN (Ude Desh ka Aam Naagrik), Nextgen Airports for Bharat (NABH) and Bharatmala have been rolled out to enhance the international and regional connectivity in the smaller cities.

As the policy initiatives have stirred growth in the right direction in small cities, we see them slowly but steadily taking strides in social and physical infrastructure development. For instance, Tier 2 cities such as Surat, Coimbatore, Vadodara, and Indore were amongst the top 10 cities on the Ease of Living Index (2020). Indore has been awarded the title of ‘India’s cleanest city’ for the fifth consecutive time. Cities such as Shimla, Coimbatore, and Chandigarh recently topped NITI Aayog’s SDG Urban Index 2021.

Not only infrastructure, but smaller cities have seen significant improvement in regional and international connectivity. Currently, 122 smaller cities have functional airports serving domestic passengers, of which 31 also serve the international passengers. There are 100 new greenfield airports planned to be built in India in the coming decade. As of 2019, the small cities took about a 30 percent share in the overall air passenger traffic in India.

These cities have also seen substantial growth in adoption of Internet and technology. As per Internet and Mobile Association of India (IAMAI), in 2020, every 2 out of 5 Internet users in urban India were from smaller cities.

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The ripple effect of the improvement in infrastructure, business ecosystem, and enhanced connectivity is visible in the growing presence of prominent national and multinational business organisations such as Tata Consultancy Services, Wipro, Amazon, and OYO, which have aided in creation of employment opportunities and reducing outward migration. The resultant growth in disposable income, proliferation of Internet and rising aspirations have led to growth in consumer demand across sectors.

Consumerism gains steam in Tier 2 cities

The small cities, especially Tier 2 cities, are emerging as hotspots with consumers having rising aspirations and propensity to spend. This is especially evident in the increase in online and luxury retail consumption in the non-metro cities.

E-commerce giants have recorded jump in consumers from the smaller cities. Snapdeal mentioned that more than 3/4^th of its order volume during the festive season came for small cities. AmazonPay revenues grew by 29 percent YoY in FY 21 with over 75 per cent of its customers using Amazon UPI coming from the Tier 2 and 3 cities. Luxury car brands see small cities as strategic markets and are planning to expand their footprint.

For instance, German automobile brand AUDI under its ‘Workshop First’ strategy unveiled in 2019, entered the non-metros of Vijayawada and Trivandrum by first setting up workshops, then following it up with showrooms. Mercedes Benz have laid out plans to expand their operations to 25 small cities.

The positive impact of shifting consumer patterns is visible in the real estate sector as well, with the smaller cities garnering interest of investors, organisations and consumers alike across asset classes such as residential, commercial, retail and warehousing.

For instance, in response to the increasing demand for retail on digital platforms in small cities, many e-commerce giants have set up their warehousing and fulfilment centres in Tier 2 cities such as Lucknow, Jaipur and Chandigarh. High-end retail spaces in the format of malls and high streets have been established in cities such as Surat, Jaipur, Chandigarh, Jaipur, Surat, Lucknow, and Nagpur, amongst others.

There has also been steady movement in growth for residential spaces in Tier 2 cities. The smaller cities have been trending on our ecis2016.org’s IRIS index closing in on Tier 1 cities for growth in online home search queries and sustained momentum of online high-intent homebuyer activity.

Residential demand on the rise in non-metros

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Tier 2 cities in the past few years have emerged as significant contributors to the residential real estate market of India. ecis2016.org’s IRIS index, which gauges the upcoming demand in the key cities (including top-eight cities and smaller cities) of India have been recording an upward growth trend, with Tier 2 cities taking a significant 50-55 percent share in the overall online property search volume. The index reached its peak in September of this year.

A deeper analysis of homebuyer queries suggests that unlike the top metros where maximum homebuyers search for apartments, Tier 2 cities witness traction for wider range of residential products such as apartments, residential plots and independent houses opening up an array of opportunities for developers planning to venture into these cities.

In terms of ticket-size, it is interesting to note that while the most of home search queries in Tier 2 cities are spread in less than INR 50 lakh price category, the share of INR 1-2 crore and more than INR 2 crore is at par with that of the larger metros. These price trends resonate with the overall increase in spending propensity in small cities.

The growth in online high-intent homebuyer activity in Tier 2 cities is more pronounced since the beginning of the pandemic. The shift towards work-from-home, importance of owning a home, persistence of COVID-19 cases in top-eight cities, and the resulting reverse migration during the pandemic, have been instrumental in catapulting the residential demand in these cities.

In fact, the trends in the past few years suggest that Tier 2 cities are catching up with the top metros. Corroborating with this, cities such as Surat, Patna, Ludhiana, Jaipur, Coimbatore, Lucknow, and Amritsar, amongst others are trending along with larger metros on the list of top-20 cities witnessing maximum online property search volume as per IRIS index. The current increase in search and queries for buying a home in Tier 2 cities are indicative of the continued growth momentum of residential demand in these cities for the coming quarters.

Tier 2 cities emerging as new growth engines of India

Rapid infrastructure development, improved standard of living, growth in disposable income and aspirations of consumers have strengthened the position of Tier 2 cities as the upcoming growth centres of India. Corroborating with the potential of economic growth in the small cities, seven out of ten cities to see the fastest growth in gross domestic product (GDP) till 2035 in the world, are Tier 2 cities from India such as Surat, Agra, Nagpur, Tiruppur, Rajkot, Tiruchirapalli, and Vijayawada, as per Oxford Economics.

While the top-eight cities will continue to be the primary economic centres of India, Tier 2 cities are developing as strong countermagnets to these larger metros by minimizing the out-migration and attracting workforce from Tier 3 cities and other small towns. With the growing interest and consumption, Tier 2 cities are poised to be the influential economic hubs of urban India in the coming period.

Source: https://ecis2016.org/.
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Source: https://ecis2016.org
Category: Lifestyle