TIER 2 CITIES : THE REAL ESTATE GROWTH ENGINES

BY Realty+

Tier-2 cities are gradually coming at the forefront of real estate growth and the trend is set to continue in the near future accentuated by the infrastructure development of these cities. As per Shankar Arumugham, Chief Operating Officer and Head, Strategic Consulting and Valuation Advisory, India, JLL, said, “The residential, as well as commercial market, has seen a steady growth along the metro corridors in Tier-II cities, owing to increase in developments alongside the routes.

Start-ups, SMEs and companies in the fintech and e-commerce segments too are focusing on emerging economic centres and smaller towns for business growth. A recent survey by JLL-Qdesq states that enterprises looking to tap into the talent pool of an increasingly mobile workforce are leading to a rise in enquiries for flex seats in Tier II cities such as Chandigarh, Indore and Lucknow.

Likewise, industrial & logistics sector players are looking at new market penetration in lower tier cities and extension of local distribution networks in emerging logistics hubs to drive leasing as per the latest CBRE report.

In the retail segment too, the tier II cities are witnessing rapid mall penetration due to considerable growth in disposable income, mobile internet penetration and support infrastructure. 

The mall supply in cities of Baroda, Budaun, Indore, Nagpur and Udaipur in the current year was close to 2.5 million sq. ft., recording a yearly growth of 91%. The consumers in tier II and Tier III cities now show an apparent propensity for branded products, which sets the stage for accelerated growth of organised retail across the country, informs Anarock report.

THE INVESTMENT POTENTIAL

One of the biggest advantages of tier 2 cities for real estate developers is the land costs. Even though property values are rising in many of the tier 2 cities, they are still considerably below those of the tier 1 locations. In addition, structured real estate markets are starting to emerge in these cities. Good connectivity infrastructure with economic boom is driving businesses to set up base in tier 2 cities in turn boosting residential demand too, in affordable as well as premium segments.

Tier 2 cities that are part of industrial corridors particularly are becoming the hotbeds for real estate market growth attracting investments across segments. Many tech companies are now location agnostic, and the workforce is opting for bigger, better and affordable homes in tier 2 cities.

Many states are incentivising manufacturing in their key tier 2 cities, for instance in 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. Such initiatives are attracting domestic and foreign investments in tier 2 cities of the country.

Not surprisingly, the organised real estate developers are finding good traction in tier 2 and are enjoying higher profit margins. Some of the tier 2 cities offering lucrative real estate investment opportunities are:

• Ahmedabad known for affordability, infra-development and premium lifestyle offers one of the best options for real estate investment, residential or commercial.
• Coimbatore is one of the biggest industrial and educational hubs providing scope of varied employment opportunities and affordable housing options.
• Jaipur is a growing IT hub, well connected with the capital city Delhi and provides ample options of residential properties as an investment.
• Vadodara, a major industrial hub too offers plenty of affordable and luxury housing and commercial real estate options at attractive prices.
• Kanpur real estate boosted by metro connectivity is becoming a favoured residential real estate choice for investors and homebuyers.
• Lucknow with the opening of Lulu mall has come on the global real estate scene and with its robust infrastructure is becoming a favoured real estate investment destination.
• Dehradun is considered among the most liveable cities in India and a second home investment option by Indians living in metro cities.
• Indore is fast emerging as a corporate hub and a sought-after real estate destination for residential as well commercial properties.
• Chandigarh with its well-planned infrastructure, burgeoning middle class and connectivity to major cities is a popular investment destination especially among NRIs.
• Visakhapatnam has witnessed fast paced infrastructure growth and new real estate projects coming up to interest buyers and investors alike.
• Nagpur with an international airport, excellent road network, metro rail services and cosmopolitan population is turning into an attractive investment destination.
• Nashik offers attractive investment opportunities in the growing industrial and IT hubs, tech parks and SEZs.
• Kolhapur, famous for housing Marathi film industry, is on a fast track growth and offers plenty of affordable properties for investments.
• Bellary in recent years has offered good investment options, especially urban housing projects in both affordable and premium segments.
• Mysore coming up as an educational hub and with improved connectivity and infrastructure development is another good investment option for real estate.
• Madurai too offers excellent connectivity and physical infrastructure along with ample natural greenery for second home investment.
• Vellore, known for its educational institutions, offers a plethora of investment opportunities and options in the property market.
• Kochi, known as the commercial capital of Kerala has a cosmopolitan vibe and is emerging as a favourable investment destination and business hub.
• Thiruvananthapuram with numerous IT hubs and good connectivity with other major cities of the country offers a variety of investment choices.
• Kozhikode, a relatively new developing city, is witnessing rapid urbanisation and therefore rising demand for property.

THE GOVERNMENT FOCUS

The Union government think tank Niti Aayog’s report states that as India transitions from a rural to an urban society, there is a need to facilitate Tier 2 and 3 cities to be the centres of economic growth.

The Digital India and Start-up India campaigns, the JAM trinity and Smart Cities Mission have accelerated the urban transformation of Tier 2 and 3 cities in India. The state governments have also undertaken various initiatives to attract IT firms and provide a conducive ecosystem by establishing industrial clusters, SEZ and various skill development initiatives.

The upcoming large-scale developments such as Delhi-Mumbai Industrial Corridor (DMIC), Vizag- Chennai Industrial Corridor, Chennai Bengaluru Industrial Corridor (CBIC), Bengaluru Mumbai Industrial Corridor, Amritsar Kolkata Industrial Corridor (AKIC) and Hyderabad Warangal and Hyderabad Nagpur Industrial Corridor to name a few will bolster connectivity and redefine the commercial property developments across tier-2 and tier-3 cities with logistics and warehousing emerging as the investment magnets along these industrial corridors.

THE DEMAND DRIVERS

• E-Commerce - E-commerce is one sector which has grown tremendously in tier-2 cities of Ahmedabad, Kochi, Coimbatore, Indore, Jaipur, Chandigarh, Bhubaneswar, Visakhapatnam, Thiruvananthapuram, Vadodara, Nagpur, Surat, Madurai, Goa and Mysore, outstripping even Tier-1 counterparts for 2020 as per reports. The ever-growing presence of service providers and brands in these cities is encouraging more real estate development and infrastructure growth.
• Education - Cities like Coimbatore, Mysuru, Mangalore, Chandigarh, Hubli-Dharwad, Belagavi have the largest count of engineering colleges, making them educational hubs of the country attracting investments as well as corporates for setting up IT and R&D hubs.
• Start-ups According to Department for Promotion of Industry and Internal Trade (DPIIT) Secretary Anurag Jain India's startup ecosystem is the third largest in the world and the country is second highest in adding the number of unicorns and more than half of the start-ups come from tier 2-3 cities. This is accelerating the growth of co-working spaces as well as commercial real estate growth while also aiding the growth of the residential real estate market.
• Integrated Townships and Gated Communities - Branded and reputed national level real estate players are expanding their geographical footprints in tier-2 cities for lower costs and higher profit margins. Given the aspirational value and disposable income available, demand for lifestyle amenities is on rise in these cities. Integrated township projects are much sought after with greenery, quality residential units and facilities within a self-sustainable development. Plotted development in gated communities too are finding favour amongst buyers in Tier-2 cities.
• NRIs - Most expats are now investing in properties in these cities with an objective of housing their parents as they prefer their hometown and also as investment or for their own future living goals, given that work from home has become a norm with many MNCs.
• WFH - The ‘work from home’ model during the pandemic has sparked off the reverse migration from metros to tier 2 cities specifically among IT professionals. Leading IT companies are embracing the idea of remote working due to multiple advantages of cost-effectiveness and low attrition rate of the workforce. Tier 2 and tier 3 cities have become the spoke network with the hub based out of a tier 1 city. This model allows leading IT firms to diversify their operations at comparatively lower cost as also diversify their workforce through contract employees bringing agility to their operational models.
• Industrial & Logistics - Logistics and warehousing sectors have already picked up across many tier 2 cities, owing to higher affordability levels, stability of prices, more options and lower competition in the market. Such developments are turning them into major employment hubs and demand drivers for real estate.

THE MAJOR CHALLENGES

Despite much physical and social infrastructure boom in tier 2 cities, most of them lack international connectivity and high paying job opportunities. On the commercial real estate front, lack of ESG compliant buildings in these cities is a major challenge for corporations. It is also critical for these cities to sustain the infrastructure development and strengthen skill development. Other issues include clear land titles, land supply, unregulated planning, capacity constraints, policy and regulatory constraints and sub-optimal land use management. Moreover, the local real estate ecosystem of many of the tier 2 cities lacks ease of doing business and transparency. Niti Aayog suggests some solutions at the government level for harnessing the economic potential of small cities:

• Sensitising state governments on the importance of developing appropriate policy frameworks at the state and city level;
• Identifying key bottlenecks that constrain these cities from fully realising their potential as engines of growth;
• Developing implementable solutions to these bottlenecks, including workable structures of urban governance and mechanisms for coordinating spatial and economic planning.
• Informing policy makers about the types of investments and activities that states and cities should prioritise from a growth and jobs perspective.

THE GROWTH POTENTIAL

The current trend could well be in the favour of tier 2 cities going forward as more companies are steadily shifting to remote working options along with other hybrid models. Leading corporates and businesses are also setting up their offices and research centres or back-offices in Tier-2 cities where they are finding a good talent pool with much lesser real estate cost.

The big realty players too are making their presence felt in tier 2 cities and investors are following suite assured of good RoI. Furthermore, the entry of organized realty firms and institutional funds is slowly and steadily bringing in professionalism in the smaller cities, real estate market.

As per D Lakshminarayanan, Managing Director, Sundaram Home Finance, due to the pricing consideration, demand off-take and congestion in metros, real estate developers have started moving towards the small cities. "We expect the Tier II and III towns to register significant growth. Nearly 70 per cent of our disbursements in the first nine months of this financial year have been from these locations. The contribution to the business from tier II and III towns used to be just over 50 per cent in the past. The tier II and III towns are likely to expand faster in the future and that offers growth opportunities for us," he had said in an interview.

Tags : Tier II Cities Housing Finance Companies Growth Opportunities Shankar Arumugham Chief Operating Officer and Head Strategic Consulting and Valuation Advisory India JLL Investment Infrastructure Economic Businesses Ahmedabad Jaipur Mysore Government E-Commerce Education Start-ups Integrated Townships NRI WFH D Lakshminarayanan Managing Director Sundaram Home Finance