Bigger land parcels, easier availability, lower land and operating costs, better quality of life… these are just some of the multiple reasons why tier 2 cities are quietly
stealing a march over metros in attracting end-user and investor interest.
By David Walker, Managing Director SARE Homes
After years of stagnation, as human spirits are once more revived in India’s stock-markets and industries, the real estate sector also awaits better investor and end-user sentiment to spur growth yet again. This time, though, metro cities may not necessarily be the sole stars of revived growth. Present trends indicate tier 2 cities are poised to steal some of the thunder from the metros.
This is not surprising, given the extent to which property prices rose steadily in the metros, despite global economic uncertainties and liquidity issues.
Advantages of Tier 2
What accounts for the rising profile of tier 2 cities? Industry analysts believe increased economic activities, steadily-improving infrastructure, the rising levels of employment and entrepreneurial opportunities, lower realty costs, the cheaper cost of living and the comparatively better quality of life (lower pollution levels, minimal traffic congestion, etc.) may all be responsible for tier 2 stealing a march over metros. Against these salient features, the metros are saturated, with their quality-of-life parameters being adversely affected.
A Cushman & Wakefield study also highlights the various advantages attracting entrepreneurs and enterprises alike, as they discover there is a rising pool of talent available in tier 2 cities at more cost-effective salaries. Moreover, bigger offices and large land parcels can be procured at lower price points. Backed by a conducive business ambience and lower operating costs, it makes more business sense for corporates to set up shop in such cities rather than remain in the metros and continue struggling with higher operating costs and worrisome attrition rates.
Additional reasons for realty’s better prospects in tier 2 is the fact that rising levels of prosperity are pushing people to opt for bigger and better homes. As the educated younger generation moves away from traditional occupations such as farming, their families are selling agricultural land on the outskirts of tier 2 and 3 cities and resettling within city precincts by purchasing large homes through their recently-acquired wealth. Furthermore, tier 2 and 3 cities are not immediately impacted by volatile global economic trends that assail the major metros.
Tier 2 and 3 cities in the north include Chandigarh, Panchkula, Amritsar, Ludhiana, Mohali, Meerut, Moradabad and Dehradun, amongst others, while those in the south comprise Coimbatore, Belgaum, Hubli, Kochi, Madurai and Mangalore, to name a few. Increasingly, even investors are turning to such cities, especially where the residential market is concerned.
In the case of some tier 2 cities, their proximity to metros also acts as an added attraction, since prospective employees feel they can always drive down to their homes over the weekends. Additionally, residents of metros seeking holiday homes in tier 2 cities are also favourably inclined towards these cities that are within driving distance. In many tier 2 cities, demand is end-user driven. Even some NRIs seeking to buy retirement homes in India may be more inclined to tier 2 cities, since larger homes (such as sprawling bungalows and farmhouses) can be purchased at lower prices. As malls, multiplexes and star hotels spring up in these cities, aspirations for better lifestyles are also being fulfilled right here.
Brighter Future Prospects
With the Narendra Modi Government seeking to boost infrastructure development, create 100 new cities and ‘Housing for All by 2022’, it is the tier 2 and 3 cities that will benefit more than the metros. As the Government moves to open FDI in numerous sectors, foreign companies seeking to do business in India will find it makes more business sense to establish their presence in tier 2 cities, where land, employee and operating costs are much lower, compared to the metros, which stretch breakeven timelines, apart from other attendant risks of high-priced cities.
Developers are also finding it easier to offer better facilities and more amenities in tier 2 cities, since land acquisition costs are much lower. In such cities, 1BHK and 2BHK residential accommodation in the mid-income bracket are the ones that attract more end-user and investor interest. For developers seeking to create integrated townships, these smaller cities offer better opportunities at much lower investment costs.
With 100% FDI being a possibility, it is but a question of time before the real estate market picks up its traditional growth momentum and property rates began to climb steadily, even in tier 2 cities.
Clearly, given such favourable factors, this is the right time to invest in tier 2 properties, when the rates are still most competitive and harbour ample scope for future appreciation.