Will 2021 be the year of real estate in tier-2 cities?

Amid businesses in India realising the advantages of the work-from-home (WFH) concept in the backdrop of the Coronavirus pandemic, there has been a major shift of the workforce towards tier-2 cities. In these cities, the cost of living is less, the work-life balance is better and housing remains affordable, as compared to mega cities in spite of a huge jump in values in the past one decade, backed by infrastructure development. This has inspired Indian real estate developers, as well as state governments, to focus more on these high-potential and yet, neglected markets.

For example, in a tourist state like 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. As tech companies become location agnostic, options like Goa could attract more investment. Many other states are working to incentivise manufacturing in their key tier-II cities, as part of the Make in India programme. Analysts maintain that such cities, which may also be part of industrial corridors, could be hotbeds for future growth of the economy and the real estate market in particular.

See also: Remote working boosts property demand in tier-2 cities

What are tier-1, tier-2 and tier-3 cities?

Indian cities are classified as X (tier-1), Y (tier-2) and Z (tier-3) categories by the government, based on the population density. There are eight metropolitan tier-1 cities – Delhi, Mumbai, Bangalore, Chennai, Hyderabad, Kolkata, Ahmedabad and Pune. On the other hand, 104 cities are categorised as tier-2, while the remaining cities fall under the tier-3 category.

Tier-1 cities are densely populated and have higher living expenses. There are major international airports, industries, top multi-specialty hospitals, education, and research institutes in these cities. Urban planners and economists believe that certain cities, officially classified as tier-2, are as good as any tier-1 city. The economic activities and lifestyle in the cities like Gurgaon, Noida, Vellore, Coimbatore, Kochi, Thiruvananthapuram, Patna, Rajkot, Goa, Lucknow and Jaipur could elevate these cities to the next level in the coming years.

Advantages and disadvantages of tier-2 cities

How COVID-19 has changed buyers’ preferences?

Aditya Kushwaha, CEO and director, Axis Ecorp, points out that the COVID-19 pandemic has altered how we live, work, learn and play. The overall health, hygiene and wellness concerns during COVID-19, have significantly shifted the focus towards spacious homes, set amid verdant greenery, away from densely packed cities. Further, riding on the wave of sustainability and prospective investment, the holiday homes/secondary housing segment has emerged as a sought-after option for buyers, whose jobs and lifestyle have remained unaffected in the wake of pay cuts. People’s preferences have shifted from the top metro cities to tier-2 and other tourist destinations, he says. “Investors believe that they can find better entry prices, flexibility and sizable returns in such locations,” he explains, attributing the shift to the concept of remote working.

See also: How the Coronavirus is changing home designs

Real estate trends in tier-2 and 3 cities

• Emergence of organised real estate markets in smaller cities.
• Lower demand-supply imbalance.
• Greater demand for quality housing with work from home.
• Lesser migrant labour issues.
• Lesser construction curbs due to COVID-19.
• Higher profit margins for developers, owing to lower land values.
• Property prices rising but yet far lesser than top 10 cities.

What is the future of real estate in 2021 in tier-2 cities?

Hiral Sheth, HOD, marketing, Sheth Creators, also believes that the internet has been the backbone of 2020, with most people working from home. With a lot of people shifting back to their home towns during lockdown and people realising the importance of having a home of their own, there has been a spike in home buying in tier-2 cities. With this trend attracting reputed developers, the quality of housing would also improve in these cities. “While realty costs in tier-2 cities will be lesser than tier-1 cities, people will also have benefits like large open spaces, that ability to stay close to family, low pollution, etc. Most tier-2 cities today have good infrastructure advancements like metro stations, excellent public transport and availability of basic facilities like schools, hospitals, banks, and shopping markets,” says Sheth.

Deepak Goradia, vice-chairman and MD, Dosti Realty, points out that with offices planning to adopt work-from-home on a long-term basis, many prospective home buyers are considering shifting base to the peripheral areas and investing in homes at more affordable prices. “The buyer’s preference for a change in location is fuelling property demand in the peripheral locations of cities today,” he says.

Check out Stamp duty rates in tier-2 cities in India

Following the Coronavirus pandemic, many businesses may also shift to tier-2 cities. Hence, it is believed that by the second half of 2021, demand would increase in tier-2 cities, owing to better employment opportunities, infrastructure growth and improving connectivity. Nevertheless, several roadblocks remain. For example, FDI for projects in these cities has been a major challenge. However, this can be made easier by the government through policies and tax initiatives and benefits that could entice people to invest and set up living and working bases in these high-potential tier-2 cities.

Tier-2 cities that are attracting property investments

When a global brokerage firm that is making its foray into the Indian real estate, announced plans to enter the Ayodhya market, many analysts believed that the decision was goaded by the hype around the Ram Mandir. However, a closer look reveals that no other city in the state of Uttar Pradesh is showing as much property appreciation as Ayodhya.

The reasons for Ayodhya turning into a property hotspot, include the growth prospect in the given city, business opportunities, cost of doing business per sq ft, affordable property prices as compared to the metro cities, reverse migration of the professionals, improving infrastructure and the upcoming airport.

Ayodhya is just one of the tier-2 cities that is witnessing property price appreciation that is much higher than the top 10 cities. It is also driving the large developers into these so far unexplored territories. For example, a leading real estate player from Noida has, over the last few, years established its footprint in and around Gorakhpur, the political constituency of the chief minister of the state.

In southern India too, attention is shifting from Bengaluru and Hyderabad to tier-2 cities like Kochi, Coimbatore, Vizag and other such regions. Although Amravati proved to be a dampener for the first movers, real estate analysts believe there are many other small cities in Telangana that would soon appear on the property landscape, as investment in those places have started for logistics and warehousing, thus, turning these cities into job magnets.

NRIs fueling tier-2 and tier-3 cities’ growth

For non-resident Indians (NRIs), in spite of the urge to own a house in one’s home towns, which are mostly tier-2 and tier-3 cities, the future livability in terms of professional opportunities in these home towns were non-existent. On the other hand, an investment in the metro cities meant that while they were overseas, their retired parents preferred to live in the comfort zone of their home towns.

The COVID-19 pandemic seems to have changed the preferences of NRIs. Now, most of the expat Indians are opting for properties in their home towns, with the dual objective of providing a house for their parents while they are overseas, as well as their own future living. Work from home seems to be the mantra for most of these NRIs and they are no longer making investments in the metro cities only. It is, hence, no surprise that many of these small towns, hitherto seen as retirement destinations, are emerging as property hotspots.

Furthermore, some of the upcoming industrial corridors run through the NRIs’ home towns in these tier-2 and tier-3 destinations. Also, the fact that grade A developers from established property markets are venturing into tier-2 and tier-3 cities, evokes confidence among the expat Indians.

Impact of COVID-19 second wave on real estate in smaller towns

Although several forecasts at the beginning of 2021, suggested that the year would witness greater real estate activity in tier-2 and tier-3 cities, many maintained that the Coronavirus crisis was a temporary phase and that the market would be back to normal, once the pandemic settled down.

However, the second wave of COVID-19 has forced both, real estate developers and home buyers, to evaluate their cost and benefit of moving to peripheral locations and smaller towns, yet again. Now, real estate stakeholders are looking at the business possibilities and open spaces in the smaller towns, from a long-term perspective.

Moreover, projects in smaller towns, make it easier for developers to incorporate concepts of wellness, as the land cost is relatively cheaper in these places. This makes it feasible to build large projects with more open spaces and amenities.

From the home buyers’ standpoint, tier-2 and titer-3 home towns are more affordable to live in and feasible to work. After all, many industries are investing heavily in IT infrastructure, making work from home a reality for their workforce. Consequently, after adopting the new normal, these companies are unlikely to reverse the trend, as it also allows them to reduce costs incurred on office spaces in the process.

See also: Winners and losers in India’s real estate, post-COVID-19

Factors that favour the growth of real estate in tier-2 and tier-3 cities

While the COVID-19 pandemic has changed the market dynamics and the norm of work from home has brought tier-2 and tier-3 cities in the reckoning of real estate opportunities, critics have their own concerns. Some of these include:

• Will the shifting of the talent pool to tier-2 and tier-3 cities be a long term phenomenon?
• Would corporates shift their base to smaller cities?
• Can tier-2 cities attract a cosmopolitan talent pool beyond the hometown prodigies?
• Will connectivity and transportation be an issue with these smaller cities?

As the world learns to live with the new normal post-COVID, many of these pressing issues are being seen as opportunities. For example:

• The cost of doing business per sq ft is much lower in tier-2 and 3 cities.
• Tier-2 and tier-3 cities are emerging as hubs for logistics and warehousing.
• Quality housing at affordable rates are available for the workforce.
• A number of upcoming industrial corridors are running through many of these smaller cities and this will provide seamless connectivity.
• The government plans to open 100 additional airports and 1,000 new routes, connecting smaller towns.

It may seem premature to make a conclusive statement as of now but the fact remains that the potential of tier-2 and tier-3 cities, is yet to be tapped. The Coronavirus pandemic has turned an adversity into an opportunity for smaller cities.

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