Tier 2 cities in India: Will 2022 be the year of real estate boom in these cities?

[ecis2016.org] Analysts believe that even as tier 1 cities in India are developing, tier 2 cities in India will be the hotbed for future growth of the economy in general and the realty market in particular when you compare between tier 1 and tier 2 cities in India

Amid businesses in India realising the advantages of the work-from-home (WFH) concept in the backdrop of the Coronavirus pandemic, there has been a major shift of the workforce towards tier 2 cities in India. In these tier 2 cities, the cost of living is less, the work-life balance is better and housing remains affordable, as compared to mega cities in spite of a huge jump in values in the past one decade, backed by infrastructure development. This has inspired Indian real estate developers, as well as state governments, to focus more on these tier 2 cities which are high-potential and yet, neglected markets.

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For example, in a tourist state like Goa, the government has been working in partnership with Software Technology Parks of India (STPI) to create the infrastructure to facilitate software exports and promote tech entrepreneurship in the region. As tech companies become location agnostic, options like Goa could attract more investment. Many other states are working to incentivise manufacturing in their key tier 2 cities, as part of the Make in India programme. Analysts maintain that such tier 2 cities in India, which may also be part of industrial corridors, could be hotbeds for future growth of the economy and the real estate market in particular.

[ecis2016.org] Remote working boosts property demand in tier-2 cities

What are tier 1 cities in India, tier 2 cities in India and tier 3 cities in India?

What is tier 1 and tier 2 cities? Indian cities are classified as X (tier 1 cities in India), Y (tier 2 cities in India) and Z (tier 3 cities in India) categories by the government, based on the population density. There are eight metropolitan tier 1 cities in India – Delhi, Mumbai, Bangalore, Chennai, Hyderabad, Kolkata, Ahmedabad and Pune. On the other hand, 104 cities are categorised as tier 2 cities in India, while the remaining cities fall under the tier 3 cities in India category.

Tier 1 cities are densely populated and have higher living expenses. There are major international airports, industries, top multi-specialty hospitals, education, and research institutes in the Tier 1 cities. Urban planners and economists believe that certain cities, officially classified as tier 2 cities in India, are so good that there is not much difference between tier 1 and tier 2 cities. The economic activities and lifestyle in the cities like Gurgaon, Noida, Vellore, Coimbatore, Kochi, Thiruvananthapuram, Patna, Rajkot, Goa, Lucknow and Jaipur could elevate these tier 2 cities in India to the next level in the coming years.

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Tier 2 cities in India: Advantages and disadvantages

How COVID-19 has changed buyers’ preferences?

Aditya Kushwaha, CEO and director, Axis Ecorp, points out that the COVID-19 pandemic has altered how we live, work, learn and play. The overall health, hygiene and wellness concerns during COVID-19, have significantly shifted the focus towards spacious homes, set amid verdant greenery, away from densely packed cities. Further, riding on the wave of sustainability and prospective investment, the holiday homes/secondary housing segment has emerged as a sought-after option for buyers, whose jobs and lifestyle have remained unaffected in the wake of pay cuts. People’s preferences have shifted from the tier 1 cities in India to tier 2 cities in India and other tourist destinations, he says. “Investors believe that they can find better entry prices, flexibility and sizable returns in such locations,” he explains, attributing the shift to the concept of remote working.

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Tier 2 cities in India and Tier 3 cities in India: Real estate trends

• Emergence of organised real estate markets in smaller cities.
• Lower demand-supply imbalance.
• Greater demand for quality housing with work from home.
• Lesser migrant labour issues.
• Lesser construction curbs due to COVID-19.
• Higher profit margins for developers, owing to lower land values.
• Property prices rising but yet far lesser than top 10 cities.

Tier 2 cities in India: Future of real estate in 2022

Hiral Sheth, HOD, marketing, Sheth Creators, also believes that the internet has been the backbone of 2020, with most people working from home. With a lot of people shifting back to their home towns in tier 1,2,3 cities in India during lockdown and people realising the importance of having a home of their own, there has been a spike in home buying in tier 2 cities in India. With this trend attracting reputed developers, the quality of housing would also improve in these tier 2 cities in India. “While realty costs in tier 2 cities in India will be lesser than tier 1 cities in India, people will also have benefits like large open spaces, that ability to stay close to family, low pollution, etc. Most tier 2 cities in India today have good infrastructure advancements like metro stations, excellent public transport and availability of basic facilities like schools, hospitals, banks, and shopping markets,” says Sheth.

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Deepak Goradia, vice-chairman and MD, Dosti Realty, points out that with offices planning to adopt work-from-home on a long-term basis, many prospective home buyers are considering shifting base to the peripheral areas / tier 2 cities in India and investing in homes at more affordable prices. “The buyer’s preference for a change in location is fuelling property demand in the peripheral locations of tier 1 cities in India and tier 2 cities in India today,” he says.

Check out Stamp duty rates in tier-2 cities in India

Following the Coronavirus pandemic, many businesses may also shift to tier 2 cities in India. Hence, it is believed that by the second half of 2021, demand would increase in tier 2 cities in India, owing to better employment opportunities, infrastructure growth and improving connectivity. Nevertheless, several roadblocks remain. For example, FDI for projects in these tier 2 cities in India has been a major challenge. However, this can be made easier by the government through policies and tax initiatives and benefits that could entice people to invest and set up living and working bases in these high-potential tier 2 cities in India.

Tier 2 cities in India that are attracting property investments

When a global brokerage firm that is making its foray into the Indian real estate, announced plans to enter the Ayodhya market, many analysts believed that the decision was goaded by the hype around the Ram Mandir. However, a closer look reveals that no other city in the state of Uttar Pradesh is showing as much property appreciation as Ayodhya, making it one of the most prospective tier 2 cities.

The reasons for Ayodhya turning into a property hotspot, include the growth prospect in the given city, business opportunities, cost of doing business per sq ft, affordable property prices as compared to the metro cities, reverse migration of the professionals, improving infrastructure and the upcoming airport.

Ayodhya is just one of the tier-2 cities in India that is witnessing property price appreciation that is much higher than the top 10 cities. It is also driving the large developers into these so far unexplored territories. For example, a leading real estate player from Noida has, over the last few, years established its footprint in and around Gorakhpur, the political constituency of the chief minister of the state.

In southern India too, attention is shifting from Bengaluru and Hyderabad to tier 2 cities in India like Kochi, Coimbatore, Vizag and other such regions. Although Amravati proved to be a dampener for the first movers, real estate analysts believe there are many other small cities in Telangana that would soon appear on the property landscape, as investment in those places have started for logistics and warehousing, thus, turning these cities into job magnets.

Tier 2 cities in India and tier 3 cities in India: NRIs fuelling growth

For non-resident Indians (NRIs), in spite of the urge to own a house in one’s home towns, which are mostly tier 2 cities in India and tier-3 cities, the future livability in terms of professional opportunities in these home towns were non-existent. On the other hand, an investment in the tier 1 cities in India meant that while they were overseas, their retired parents preferred to live in the comfort zone of their home towns.

The COVID-19 pandemic seems to have changed the preferences of NRIs. Now, most of the expat Indians are opting for properties in their home towns mostly in tier 2 cities in India, with the dual objective of providing a house for their parents while they are overseas, as well as their own future living. Work from home seems to be the mantra for most of these NRIs and they are no longer making investments in the metro cities only. It is, hence, no surprise that many of these small towns, hitherto seen as retirement destinations, are emerging as property hotspots.

Furthermore, some of the upcoming industrial corridors run through the NRIs’ home towns in these tier 2 cities in India and tier-3 destinations. Also, the fact that grade A developers from established property markets are venturing into tier 2 cities in India  and tier 3 cities in India, evokes confidence among the expat Indians.

Tier 2 cities in India: Impact of COVID-19 second wave on real estate

Although several forecasts at the beginning of 2021, suggested that the year would witness greater real estate activity in tier 2 cities in India and tier 3 cities in India, many maintained that the Coronavirus crisis was a temporary phase and that the market would be back to normal, once the pandemic settled down.

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However, the second wave of COVID-19 has forced both, real estate developers and home buyers, to evaluate their cost and benefit of moving to peripheral locations of tier 1 cities and tier 2 cities in India yet again. Now, real estate stakeholders are looking at the business possibilities and open spaces in the smaller towns- tier 2 cities in India and tier 3 cities in India, from a long-term perspective.

Moreover, projects in smaller towns- tier cities in India, make it easier for developers to incorporate concepts of wellness, as the land cost is relatively cheaper in these places. This makes it feasible to build large projects with more open spaces and amenities.

From the home buyers’ standpoint, tier 2 cities in India and tier 3 cities in India home towns are more affordable to live in and feasible to work. After all, many industries are investing heavily in IT infrastructure, making work from home a reality for their workforce. Consequently, after adopting the new normal, these companies are unlikely to reverse the trend, as it also allows them to reduce costs incurred on office spaces in the process.

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Tier 2 cities in India and Tier 3 cities in India: Factors that favour real estate growth

While the COVID-19 pandemic has changed the market dynamics and the norm of work from home has brought tier 2 cities in India and tier 3 cities in India, the reckoning of real estate opportunities, critics have their own concerns. Some of these include:

• Will the shifting of the talent pool to tier 2 cities in India and tier 3 cities in India be a long term phenomenon?
• Would corporates shift their base to smaller cities?
• Can tier 2 cities in India attract a cosmopolitan talent pool beyond the hometown prodigies?
• Will connectivity and transportation be an issue with these tier 2 cities in India and tier 3 cities in India?

As the world learns to live with the new normal post-COVID, many of these pressing issues are being seen as opportunities. For example:

• The cost of doing business per sq ft is much lower in tier 2 cities in India and tier 3 cities in India.
• Tier 2 cities in India and tier 3 cities in India are emerging as hubs for logistics and warehousing.
• Quality housing at affordable rates are available for the workforce.
• A number of upcoming industrial corridors are running through many of these smaller cities and this will provide seamless connectivity.
• The government plans to open 100 additional airports and 1,000 new routes, connecting smaller towns.

It may seem premature to make a conclusive statement as of now but the fact remains that the potential of tier 2 cities in India and tier 3 cities in India, is yet to be tapped. The Coronavirus pandemic has turned an adversity into an opportunity for smaller cities.

Will tier 2 cities in India attract real estate funds?

Post-COVID-19, while there is no denying that the sentiment has shifted to tier 2 cities in India, there remains a big question mark over the long-term financial viability of the business in these smaller cities. Tier 2 cities in India are yet to catch up, in terms of institutional funding.

As per the industry reports:

• Major real estate investments are concentrated in the key markets of metro cities.
• Bengaluru, Mumbai and NCR alone get nearly two-thirds of the investments in the real estate.
• Institutional funds are reluctant to put in money with the lesser-known developers of tier 2 cities in India and tier 3 cities in India markets.

The question hence, is what should be done to change the market trend of investment? Analysts believe these are early days to evaluate the investment worthiness of the high potential but hitherto unexplored markets. The shift of national-level listed developers, with sound track record of attracting investments, is pretty slow. These developers are mostly testing the waters as of now. Moreover, the local-level ecosystem of many of the smaller cities is not very business-friendly. Even the property brokerage business is not very transparent and organised in these cities.

Once the large players start delivering projects in these smaller cities, the benchmark of expectations and professionalism will definitely increase. This will have a snowball effect and institutional funds will have more confidence in these markets. Also, some of the global names, like Berkshire Hathway HomeServices, have announced their plans to enter tier 2 cities in India and tier 3 cities in India. While it may take time, professionalism and change in the ecosystem in the smaller cities, would attract sizeable investments in the future.

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