HOW TIER 2 & 3 MARKETS ARE SHAPING REAL ESTATE FUTURE
The Indian real estate market, often regarded as a vital indicator of the nation's economic health, has displayed remarkable resilience across several business cycles. Despite the difficulties presented by the COVID-19 pandemic, the market has remained surprisingly robust, particularly in Tier 2 and Tier 3 cities. These consist of around 97 and 33 cities, respectively, with a significant population, and as per a report by the National Council of Applied Economic Research (NCAER), these cities accounted for nearly 40% of India’s GDP in 2015, with projections indicating an increase to 45% by 2025. In recent years, we have witnessed a sizable migration of people from large metropolitan cities to smaller cities. This shift has been driven by various factors, including the availability of flexible work arrangements, digitalisation, and a lower cost of living. This has led to a substantial surge in demand for real estate in Tier 2 and Tier 3 cities, presenting significant opportunities for investment and growth. Availability of space, facilities, and financing options One of the primary reasons behind this trend is the availability of ample land and space in these cities for real estate development. Unlike metropolitan cities, which are often plagued by space constraints and high land prices, smaller cities offer an abundance of land at comparatively lower prices, making them attractive investment options. This, coupled with the availability of a range of facilities such as improved infrastructure, transportation, and logistics have contributed to the growth of businesses and creation of job opportunities in these cities. Furthermore, the rental yield in Tier 2 and Tier 3 cities are significantly higher when compared to metropolitan cities, largely due to the lower cost of living and the increasing demand for housing in these areas. Supportive government policies: The Union Budget 2023 has allocated Rs. 10,000 crore per annum to the Urban Infrastructure Development Fund (UIDF) for public agencies to further enhance the urban infrastructure in Tier 2 and Tier 3 cities. The Pradhan Mantri Awas Yojana, which aims to provide affordable housing for low and moderate-income residents of all rural and urban areas, has also made significant progress. Of the 2 lakh crores of central aid committed, over Rs. 1.47 lakh crores have been released so far. The Production Linked Incentive Scheme (PLI) also encourages investments in different real estate types such as agricultural, industrial, and commercial. This allocation demonstrates the government's commitment to sustainable urban development, economic growth, and citizen welfare, attracting new businesses and investments in these cities. Despite this, there is not enough capital chasing the emerging opportunities since it offers relatively lower margins due to lesser capital values. This has led to increased dependency on informal sources of financing. As any delays or cost overrun can adversely impact the profitability, selecting the right set of promoters and projects remains key for investors. Sustainable development trends: While we have seen considerable real estate boom in Tier 2 and 3 cities, it is essential for developers to also take charge of the operation processes such that sustainable, environment conscious practices become an everyday norm and way of working in the real estate industry. This involves seamlessly integrating environmental and occupational health and safety considerations across all stages of the project lifecycle, starting from its conceptualisation through the design, construction, and completion phases. For example- Implementation of water conservation techniques, waste segregation protocols, and the utilisation of alternative energy sources, labour safety, etc. Low-carbon buildings have been proven to incur lower operating costs, command higher resale values, and achieve higher occupancy rates. The green building movement has been catching momentum in India; as per a report by the India Green Building Council, almost 11,053 green building projects have been registered across the country so far. The number of home buyers in India is expected to increase and the country’s home loan market is set to double in the next five years, reaching a staggering Rs. 48 trillion, as per SBI Research. Given the growing opportunities for developers and homebuyers alike, it is safe to say that Tier 2 and 3 cities will substantially dominate this development. To address the challenges posed by projects in these markets, implementing tighter project execution measures is the recommended approach for risk mitigation. Strategic approaches and investments in these regions can lead to remarkable growth and propel the real estate sector to new heights.
Tags : Tier 2 Tier 3 markets shaping real estate future Nikhil Kejriwal Principal Investment Officer SWAMIH Investment Fund demand real estate opportunities Indian National Council of Applied Economic Research GDP migration opportunities investment growth