Tier-II & Tier – III Cities of India – Are They Truly a Paradise for Real Estate Developers?

We often hear of Tier I and Tier II cities of India, but not many are sure on what basis they are classified. Let’s simplify this understanding first. Indian cities are classified purely on the basis of their population size. Cities with a population in the range of 50,000 to 100,000 are classified as tier 2 cities, while those with a population of more than 1,00,000 falls under tier 1 category. One more significant classification is that of Tier 3 Cities; where population varies from 20,000-50,000.  

As one witnesses a saturation in the economic growth and construction opportunities of the major cities of India, concurrently a number of tier II and III cities have been found to deliver a successful economic growth in the past decade. These smaller cities are also eyed by investors who are looking for affordable options that could get them higher rental yield. Unlike the metro cities, property values are not more than the rental yield earned tier II and III cities.

Scarcity of land resources, high land and construction-related costs, unaffordable property prices, high inventory levels and a declining demand in the Tier I cities is forcing developers and investors to shift their focus towards tier II and tier III cities.

Inspite of low public investments, these cities are promising a great ascent. However, not all tier 2 and tier 3 cities are capable of showing the same growth potential. Majority of the cities which have shown development are well connected with metro or tier I cities, have a cluster of industrial set-ups and have had a considerable amount of infrastructural development.

With a success story in all the fields, they have some inherent advantages like:

Rapid Infrastructural Development

Conducive Government Policies and Initiatives

Ample Availability of Land

Adequate Skilled Labour

Well Planned Basic Amenities

Low Fixed and Overhead Costs  

‘Smart City’ Concept:

Several of the Tier II cities feature in the 100 cities selected for the ‘Smart Cities’ mission whose objective is “to provide core infrastructure and give a decent quality of life to its citizens, a clean and sustainable environment and application of ‘Smart’ Solution”. The Smart Cities mission is good for Tier II cities because it turns the spotlight towards India’s smaller cities which are often left out of the conversation on urban development and urban renewal. They will thus benefit from large resources that the central government has allocated for infrastructure and urban service delivery under this project. Hence, while choosing a city, a developer can focus on these regions for expansion of their  projects and plans.

Role of Regional Players:

Tier II and Tier III cities still represent a great story, especially in terms of affordable housing for industrial work-forces. However, this story may no longer be suitable for some of the larger developers. These are the locations where the strength of regional players will come into play.

There is at least one strong developer in every region. These brands have demonstrated that they understand their area better than any players who arrive from the outside to experiment on the Tier II / Tier III story.

The success of these local developers will inspire larger developers from outside, after the fundamentals of that area’s demand are captured sufficiently and the markets are sanitized in terms of municipal and financial market stabilization.

In a couple of years, developers will have realigned their business strategies sufficiently to leverage the potential of Tier II / III cities that have sufficient market drivers or are witnessing considerable investor’s activity.

What the future holds:

When it comes to long-term property investment, there is definitely no reason to look only at the metros. India has the highest rate of urbanization among the BRIC nations. 854 million people will live in Indian cities by 2050 – that is more or less the combined population of present-day USA, Brazil, Russia, Japan and Germany. Our country clearly needs more cities, and the ones which are growing now will grow exponentially in times to come. The action in the real estate industry is now set for change towards smaller cities. 

With this vision in mind, we at Monest have already expanded our operations in cities like; Bhubaneswar, Ranchi, Asansol, Durgapur, and Guwahati.

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