Buoyed by the growing economic and business base, fast expanding infrastructure and connectivity, Tier 2 and Tier 3 cities are the new growth boosters of real estate. Particularly, post-pandemic, these cities have gained momentum to emerge as the bright stars on the urban landscape.

fast expanding infrastructure and connectivity

The Modi government’s massive push to build highways and expressways, besides expansion of rail, metro, and air connectivity, has provided a big boost to real estate in many Tier 2 cities, which are getting metro rail and regional air connectivity. Despite big strides made by these cities in recent years, Tier 2 & 3 cities have only 30% market share of residential real estate. This itself shows the massive scope of real estate growth in these cities.

The low cost of living with high lifestyle quotient, marked by premium residential developments with choice of apartments, villas and independent floors, pulsating high street shopping, high-end malls, branded hotels, restaurants, and recreation centres, is what makes these small cities tick. Post-Covid, as per an Anarock report, cities like Lucknow, Indore, Chandigarh, Kochi, Coimbatore, Jaipur, and Ahmedabad are going to be the main beneficiaries of reverse migration. In the aftermath of the pandemic, the concept of ‘remote work’ is boosting residential realty in Tier 2 & 3 cities. The growing trend of buying vacation homes in holiday destinations in the hills and on beach locations is giving a further fillip to residential real estate.

Tier 2 & 3 cities dominate the senior living segment with 60 percent share of the total 55 ongoing/completed senior living projects. Prominent Tier 2 cities like Coimbatore, Jaipur, Bhiwadi, Puducherry, Kodaikanal, Vadodara, Bhopal, Mysuru, Dehradun, and Kasauli have made their mark in senior living. Max Group has their senior living homes in Dehradun and Noida; Ashiana Developers have projects in cities like Jaipur, Bhiwadi; Paranjape in Vadodara; Columbia Pacific in Pondicherry and Kanchipuram; Bahri Estates in Kodaikanal; Oasis in Bhopal; and Covai Care in Coimbatore, Mysore and Puducherry.

Big developers are fuelling the real estate boom in Tier 2 & 3 cities. In the NCR cities of Gurgaon and Noida, established real estate developers like Tata Housing, Prestige Estates, Sobha, Mahindra LifeSpaces etc are proactively engaged in residential development.

According to PropEquity report for Q3 2022, Ahmedabad (Rs 83,390 cr), Surat (Rs 30,179 cr), Vadodara (Rs 26,177 cr), Jaipur (Rs 15,797cr), Mohali (Rs 13,742 cr), Nashik (Rs 13,622 cr), Gandhinagar (Rs 12,282 cr), Lucknow (Rs 10,148 cr), Visakhapatnam (Rs 10,090 cr), and Nagpur (Rs 9,370 cr), are the top 10 Tier 2 cities by market size of residential realty in the last five years (FY 2017-18 to FY21-22). Mohali tops the list of top 10 cities based on price growth, with a CAGR of 13.7%; followed by Jaipur (10.2%), Bhubaneswar (8.7%), Bhopal (8.3%), Gandhinagar (6.6%), Guntur (6.3%), Coimbatore (5.9%), Mangalore (5.8%), Trivandrum (5.7%), and Indore (5.5%).

fast expanding infrastructure and connectivity

Looking at residential supply and absorption, the western region leads in both supply and absorption with respective shares of 69% and 62%.The supply share of the northern region is 17%, while the share of South and East is 10% and 4%, respectively. In terms of absorption also, North follows the West with a 22% share, followed by South (12 %) and East (4%). Top 10 cities based on supply include Ahmedabad (169894 units), Vadodara (74090 units), Surat (62964 units), Nashik (42987 units), Jaipur (36008 units), Gandhinagar (31898 units), Mohali (20928 units), Nagpur (20157 units), Visakhapatnam (17491 units), and Bhubaneswar (13422 units). Ahmedabad, Vadodara, and Surat retain the top positions in absorption also with 167584 units, 76531 units, and 58193 units, respectively. These cities are followed by Jaipur (40869 units), Nashik (38654 units), Gandhinagar (26942 units), Nagpur (23139 units), Mohali (23105 units), Bhopal (19782 units), Lucknow (18951 units).

Ahmedabad, Vadodara, Nashik, and Surat occupy the top 4 positions in terms of projects launched and projects delivered. Ahmedabad has 1412 launched projects to its credit, followed by Vadodara (820), Nashik (820), Surat (409), Gandhinagar (322), Nagpur (270), Visakhapatnam (231), Jaipur (229), Goa (192), and Bhubaneswar (153). With 1440 projects, Ahmedabad tops the list of completed projects, followed by Vadodara (791), Nashik (591), Nagpur (296), Jaipur (292), Bhopal (281), Gandhinagar (199), Goa (197) and Kochi (188).

The rise of residential real estate in Tier 2 & 3 cities can be judged by the growth in home loans. Deepak Parekh, Chairman, HDFC, opines that since the mortgage to GDP ratio in India is still very low at 11%, there is a lot of scope for growth. In the coming times, Tier 2-3 cities will contribute significantly to demand for housing finance which is set to double to $600 billion in 5 years. Sundaram Home Finance has pegged Tier 2-3 cities to be the growth drivers of housing finance over the next few years.

Says D.Lakshmi Narayanan, Director, Sundaram Home Finance, “Due to lower prices, robust infrastructure and connectivity, less congestion compared to metros, and the growing demand for homes, developers are moving to Tier 2-3 cities. As these cities are expected to expand faster in the coming years, we are planning to further penetrate into these cities to tap the demand potential.”

On the commercial real estate front also, Tier 2 & 3 cities are faring well. With improved employment and business opportunities, more and more corporates are opening their offices here. During the Covid pandemic, corporates faced major disruption in their business operations due to lockdowns. So, to keep business continuity intact in the event of a Covid-like emergency situation, corporates are opening satellite offices in Tier 2-3 cities. And since corporations, small businesses and start-ups want to cut operational costs, they prefer to take space in co-working offices, which has opened up a big opportunity for co-working offices. Smartworks, a leading co-work operator, has recently expanded to Jaipur and Indore.

Having a large pool of skilled talent and a strong base for innovative start-ups amidst accelerated business and economic activities, Tier 2 & 3 cities are propelling both commercial office and retail real estate. These cities are becoming dotted with modern office buildings and office cum retail complexes, and even emerging as tech towns of the future. According to a leading real estate consultant Savills, the IT- Business Process Management sector which has a 50% share of the total office space leased in the last five years, is expanding to Tier 3 cities and is expected to clock a cumulative leasing of 100 million sq ft by 2026.

Along with their high streets, these cities are today known for their big shopping malls and multiplexes. According to a CBRE report, Chandigarh, Jaipur, Lucknow, Coimbatore, Kochi, Thiruvananthapuram, Visakhapatnam, Ahmedabad, Indore, and Bhubaneswar are the new hotspots of commercial real estate. With a high liveability index on education, health, hospitality, and recreation, Tier 2 & 3 cities score high. Going forward, with further expansion of infrastructure and connectivity, these cities will continue to be major growth drivers of real estate.

The author is Editor, Torbit Realty Contributing Editor, NBM&CW Real Estate Columnist CNBC MoneyControl.com Editor, ‘A to Z of Residential Real Estate’ Founder Editor, Realty Plus
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