Tier II & III Cities - Growth Engines for the Future

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. Tier II cities like Ahmadabad, Kanpur, Chandigarh, Patna, Dehradun, Pondicherry, Pune etc have a population of around one million, whereas minor cities with population less than one million like Madurai, Baroda, Nashik and Trichy are termed as Tier III cities.


Inspite of low public investments, these cities are promising a great potential. With a success story in all the fields, they have some inherent advantages like possessing basic amenities, ample availability of land and skilled labour.

In the new emerging India, the growth opportunities in these sectors (that have remained an untapped asset of the country for long) is primarily due to the gigantic gap between availability and demand. The growth of these two tiers gestures towards a positive sign for the nation with their efforts to deviate the pressure on the metros which are dwindling under the burden of space, time and infrastructure. This offset of pressure will also facilitate an improved distribution of wealth, in due course increasing the status of rural India. A number of cities in these two tiers having benefitted from the Jawaharlal Nehru National Urban Renewal Mission (JNNURM) - a scheme that was launched in 2005 undertaking a massive city modernisation, have shown marked opportunity for growth.


Real estate firms and IT companies are observing a shift to these cities for cheaper real estate and manpower. Evidently, there are many factors driving the growth of real estate in these two tiers - walk-to-work concept, quality lifestyle, media exposure, the emergence of software companies and an increased affinity to retail. One has been noticing significant improved real estate options in cities like Chandigarh, Patna, Mohali, Nagpur, Lucknow, Agra, Udaipur. In such places, the concept of low-cost housing or affordable houses also works well.

Whether it's banks, BPO's, cinemas, FM stations, electronic companies like Lenovo, Nikon India, and Sony India; everyone is looking towards these smaller cities for more profit. Even in case of design, cities like Ahmedabad and Pune with their multitude design centres and institutes point towards the availability of skilled design talent in these cities. In smaller cities like Mysore and Mangalore where less rentals are complimented with good infrastructure, even pre-schools have been growing at an incredible 120% per annum. Chandigarh, Coimbatore, Vadodara, Jamshedpur have become the hub of e-commerce and feature as the top four small cities for online shopping. Towns of Gujarat like Ahmedabad, Surat and Vadodara have made huge progress industrially. An encouragement is being showered for air travel between these tier cities and efforts are in progress on getting them on the aviation map.

India's hospitality sector is also envisaged to witness a steep growth in these cities.

A number of factors co-exist that make these cities as an attractive investment destination for all.

In a recent study of Top 10 emerging business destinations in India, conducted by Cushman & Wakefield, global real estate solution providers, the growth in Tier II and Tier III cities is aided by 'the increasing disposable income of the people that has created immense opportunities for companies looking out for new markets to grow'. The study also mentions that companies being drawn to these cities are being enticed due to the 'availability of talent pool at a lower cost, reasonable real estate prices and a 'conducive business environment' created by State and local governments. Further, Tier II and III cities because of 'outstanding performance' in skill-based manufacturing industries such as automotive, consumer and capital goods, engineering, textiles, pharmaceuticals and sectors such as biotechnology and IT/ITeS, have witnessed industrial growth, paving the way for rapid urbanisation. The study identifies the cities of Ahmedabad, Bhubaneswar, Chandigarh, Coimbatore, Jaipur, Kochi, Indore, Nagpur, Vadodara and Visakhapatnam as the top 10 emerging cities of India. Whereas Coimbatore has more than 25,000 small and medium enterprises (SMEs), Vishakhapatnam has been found to be suitable for industries such as mining, heavy manufacturing etc. Jaipur has been counted as a significant service sector investment while Ahmedabad has been hailed as an attractive investment in the manufacturing sector.

Real estate trends - whether residential or commercial are noticing a shift and have seen a major growth in these sectors. These cities pose cost advantages, lesser salary expectations and lesser price fluctuations to many businesses which are initiating a shift to these smaller cities. A comparative cheaper labour cost and low operation cost add to these advantages. In smaller towns, the proximity of various companies with each other gives rise to clusters, which results in the development of a specific location, aiding smaller companies in marketing and in finding the right customer. For developers, the return on investment is higher and much more stable as compared to in the metros. Neither of these smaller cities has been hit and affected by global factors as felt in the metros.

Thus with an increase in employment opportunities (with a major change perceived in the manufacturing and service sector), home buyers are increasingly becoming more interested in the properties. Viewed as excellent investment options, these places come to be more cost-effective than metros which have escalating property prices. Many people have been investing in these cities for their second homes for aged parents for whom the fast paced life of metros is a deterrent. The improvement in connectivity has made these cities more accessible and hassle free. International airports are a part of cities like Chandigarh and Amritsar. These cities also provide great opportunities for investors like NRI's who want to avoid going vertical and prefer a bungalow spread over large acres of land. Also tier II and III cities mitigate the disadvantages that are associated with metros - of a reduced quality of life, high cost of living, expensive transportation, huge traffic and travel time, expensive house rent and education. Whereas metros are suffering various drawbacks in projects like delay in execution, overall slowdown in demand and a dip in the supply, smaller cities like Pune are experiencing increased demands for mid-segment housing.


Also with developers offering lifestyle facilities, security and comforts in their projects in these tiers, the customers find many reasons to get attracted here. Tier II and tier III cities come with less risk factors as the appreciation in real estate prices is gradual unlike metro cities which experience a steep escalation.

Studies also validate that the sustainability rates are higher in these towns and coupled with intrinsic thinking these cities are coming up with innovative ideas in terms of design.

Metros are on the way for Jaipur, Kochi, Pune, Chandigarh, Ahmedabad, Kanpur, Ludhiana, Bhopal, Indore, and Faridabad.

The overcrowding in Tier I cities have compelled people to move out to open spaces with wider infrastructure, and nature-friendly ways. A change in real estate trends is noticed in cities like Jaipur, Chandigarh, Indore, Nasik etc. Many like Mohali and Agra are being considered as a favourite destination for global investors. Developers like Tata Housing, Lodha Builders, Raheja, Ansal Housing and DLF have launched projects in these smaller towns.

Sahara Infrastructure and Housing have recently launched a number of integrated township projects across Tier II and Tier III cities in India in Pune, Aurangabad, Jodhpur, Gwalior, Bareilly, Solapur, Porbandar, Katni, and Kashipur spread over 900 acres. Seven more integrated projects are already under construction in Lucknow, Jaipur, Indore, Nagpur, Ahmedabad, Satna, and Coimbatore.

Tata Housing Development Company Ltd has entered into long- term plans with Tier II and Tier III cities. Focussing presently on Pune and Bhubaneswar, their premium development, Ariana in Bhubaneswar, a housing project catering to different segments of the society commenced its construction recently. Phase 1 of the project will be completed in another three years. Rajeeb Dash, Head - Marketing of the firm confirms that Tata is looking to sustain growth over a long time in these tier cities since these are growing faster with infrastructure much better than in Tier I cities. "The cities are lucrative and have lots of captive consumption - a lot of people outside the city are investing in properties in the city where they would like to go back after their careers". Ariana, designed by an international architect from Hong Kong is going to have gold certified green homes with all modern amenities intact.

Ansal's hi-tech residential township - the 3500 acres Sushant Golf City in Lucknow once completed is going to have an international standard 18-hole golf course, luxury villas and designer landscaping.

Sattva Group has already forayed into Tier II cities with two housing projects in Coimbatore and Jaipur, the construction of which are supposed to commence by April 2013. With plans to foray into Nagpur and Vizag too, Mr Bijay Agarwal, Chairman of the Sattva Group and Managing Director of Salarpuria Sattva Group maintains that their reason to venture into tier II has been because of the immense scope that it provides. "If we have to talk about Vizag and Coimbatore their infrastructure is no less than Tier I cities. With good hotels, good roads, good water, people are now moving to these places where they can get everything", he adds. It will be a while though before the Sattva group ventures into Tier III cities which according to Mr Agarwal 'are still lacking in infrastructure'.

Best Western International Inc, the world's largest hotel chain from USA has planned to open 66 new hotels in India in the next 4-5 years and with a special emphasis on tier II and tier III cities where according to the company's president 'quality hospitality is just emerging'. Amritsar, Baddi, Gurgaon, Jaipur, Katra, Manesar, Aurangabad, Bhubaneswar are some of the cities that have been found apt for these.

For Prestige Group, the cities of Mysore and Mangalore are the ones in these tiers that are soon going to see some projects. Their brand is coming up with its famous Forum mall in both the cities, which are going to be completed by Dec 2014. While an apartment building by the group will be ready in Mangalore by mid 2015, the group is presently negotiating for land for high quality homes in Mysore. Mr V Gopal, Executive Director – Projects & Planning of the firm admits that Mangalore is a little richer city than Mysore and through the Forum mall, the group is aiming to bring in some form of leisure and entertainment to both the cities. "With enough of potential and with infrastructure much better than what it was before, Mangalore can take good quality housing. The business is improving there, there are lots of offices, and factories to support these housing. The roads have started improving and are better than what they were before and the power situation presently will be able to support the kind of infrastructure we are giving. Rest, we will need to wait and see for 2-3 years," opines Mr Gopal.

Tier II and Tier III cities can also face many constraints like easy approval of FDI for projects in these cities. This can be made easier by the Government through policies and tax level initiatives and benefits that could entice people to stay back in the city.


The government has shown strong support to these cities by trying to upgrade the urban infrastructure by upgrading the MRTS, airports; introducing SEZs etc. Also proactive government policies for residential developments in towns like Baddi in Himachal Pradesh and Pantnagar and Rudrapur in Uttaranchal, have led to immense development of these places.

Recently, on the inauguration of the 20th National Quality Summit 2012, Chief Minister of Karnataka Mr Jagadish Shettar elaborated on the State Government's plan to improve tier II and tier III cities to promote them as 'innovation centres'.

Mr Dash maintains that it is with the help of Government that they are entering the markets since Ariana is a project that Tata Housing has ventured into, in the PPP mode with the Local government.

Accepting that it is majorly due to the State Government's efforts that these cities are growing so well, Mr Agarwal adds, "After Hyderabad, Vizag is the city where the state government has put in a lot of efforts. The roads, the new airport, good hospitals - all this could have not been possible without the Government's initiative. Whenever builders like us are stuck anywhere in the projects, the state government has offered total cooperation and made ample efforts to get a solution immediately to avoid any delays. They might not have made any policies which have directly affected these cities but have helped in their own ways."