Summary of this article
Investor focus shifts beyond metro cities
Infrastructure and GCCs drive regional demand
Growth uneven across Tier-II, Tier-III markets
The Indian real estate sector is on the verge of several structural transformations, one that takes away the spotlight from dense metro markets to the fast-evolving Tier-II and Tier-III cities. For years, metro cities have dominated the real estate market in India; however, this is changing, and quite quickly. In a recent conversation with Shekhar Patel, President, CREDAI, it was revealed that the buyer sentiment is not the only driving force for the growth of Tier-II and Tier-III cities.
Post-pandemic, several Global Capacity Centres (GCCs), Information Technology Enabled Services firms (ITeTs) and IT companies saw an opportunity in Tier-II and Tier-III cities aided with cost-cutting benefits. Patel highlights how this is a part of a bigger economic infrastructure and behavioural change that is reshaping how Indians are investing in housing.
What Has Changed?
The most defining feature that marks this change is the decentralisation of economic activity. GCCs, IT companies and investors are looking beyond the four or five options like Bangalore, Hyderabad, Pune, Delhi and Mumbai to invest in. Now, they are not the default investment magnets; the concentration is diffusing. This movement is not speculative or parallel to other stakeholders; the government has been investing in making this change for the past 10 years. “The second thing is the infrastructure boost by the central government, which they have created. For the last 10 years, they have been focusing on infrastructure, and they have created a very good connectivity, be it through metros, railways or aviation projects,” adds Patel.
By making efficient connectivity, freight corridors, and modern infrastructure a standard of development, cities defined as Tier-II and Tier-III have been made more viable for businesses and residents.
At the same time, hybrid work models have reduced the need for daily commuting to the central business hubs. This has also altered the demand cycle, people now consider homes for relatively lesser price, being at a distance from the core hub while having efficient connectivity like metros, highways and rail corridors.
Another core segment of this change lies in land economics. In Tier-I cities, the costs of land are higher while availability is low; this compresses pressure on the developer, and hence the prices move upwards. Tier-II and Tier-III cities offer larger land parcels than what is available in Tier-I cities, at a much lower acquisition cost. This allows the developers to plan their projects that offer amenities similar to those of luxury projects. For the investor, this translates into a lower entry price and the potential for appreciation as cities grow and investment opportunities arise.
Ground Reality
Despite the proof of growth, the story of Tier-II and Tier-III cities has its own challenges. What is being talked about and what is being left out are two different realities of the same thing.
First, even though the infrastructure has improved, it is quite uneven throughout the Tier-II and Tier-III markets. Only a select few markets from the Tier-II and Tier-III segments have outperformed the speculated growth. The locations of the markets are still the main defining factor of the growth.
Second, the rental markets in these cities are still evolving. Unlike metros, where rental demand is deep and diverse, many Tier-II and Tier-III markets are dependent on specific institutions or industries. This creates a disparity in data.
Third, while big-name developers are entering these markets, the ecosystem is mixed. Local beliefs on credibility and adaptivity are still under questioning.
Hence, the assumption that there’s a uniform capital appreciation in these markets is wrong. While certain micro-markets, especially those that are linked to infrastructure or employment corridors, are growing fast, the rest are still at a moderate growth pace.
However, Patel assures that these factors might exist now, but they are surely not the reason to seize the Tier-II and Tier-III growth. “Tier-II tier-III city development is picking up, and it is picking up very fast,” reaffirms Patel. In essence, these markets are not small bets; they are structured opportunities that reward the informed buyers.
