Tier II Cities: Upcoming Real Estate Investment Destinations

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When it comes to the Indian realty market, it is generally the metro & tier I cities that play central role in most of the key discussions. However along with cities such as NCR, Mumbai and Bangalore, various tier II cities are also increasingly offering a compelling case study in terms of rise in real estate activities. In fact compared to metro cities, it is estimated that there has been higher surge in terms of price of residential units in tier II cities.

New Engine of Growth

With a large number of existing metros reaching saturation point due to excessive development in the recent past, it is expected that tier II cities will play significant role in growth and development in the coming time. Also given the existing rate of urbanization, which places India ahead of the other three BRIC nation, it will be essential that tier II cities constitute a major portion of the upcoming urbanization phenomenon.

In the recent past along with their metropolitan counterparts many of the Tier II cities such as Chandigarh, Coimbatore, Cochin, Surat, Ahmedabad and Jaipur has witnessed a surge in economic activities in the form of IT/ ITES, automobile and manufacturing industry etc. Not to mention, financial services, consumer goods and agro industries.

The rise in economic activities is translating into surge in physical infrastructure and civic amenities along social infrastructure in the form of good quality schools, colleges, medical facilities and restaurants etc. This eventually has resulted into higher demand for residential units in such cities. With many Grade A builders moving into such cities to tap into the growing demand has further added momentum.

Better Quality of Life

In the recent past, due to exponential growth registered by major metros in India, the overall quality of life has suffered. Metro cities are increasingly becoming crowded and marred with pollution and heavy traffic congestion thereby affecting overall quality of living. In contrast tier II cities are believed to give better quality of living.

Lower Real Estate Price

In most of the major metros in India, prices have expanded exorbitantly with residential units reaching beyond the reach of large chunk of average buyers. On the other hand even though prices have appreciated in tier II cities, the cost of residential units are still believed to be within reach of large proportion of buyers. The relatively lesser prices in residential units in tier II cities are attributed to lesser land price and cost of labor.

Higher Appreciation

Due to factors mentioned above, there has been upswing in demand towards residential units in Tier II cities. On the other hand the supply has been limited because the property markets in such cities have been mostly dominated by regional players with limited presence of Grade A builders (Even though Grade A builder are looking up to such cities). Due to mismatch in the demand supply dynamics, the prices have been appreciated rapidly in the recent past.

Other Factors

There are other factors as well, which are driving the residential property markets in Indian tier II cities. For instance in Ahmedabad, the proposed Financial City, which will house some of the leading banks and financial institutions is giving some extra push to the realty market. Likewise, Ahmedabad is also part of the Delhi Mumbai Industrial Corridor (DMIC) and is expected to witness higher economic activities in the coming time.

Likewise Jaipur, the capital of Rajasthan is registering an appreciating residential market on the backdrop of a robust tourist industry and rapidly escalating physical infrastructure that includes rolling out of the metro line. Jaipur’s proximity to the NCR region and its presence in the DMIC further adds to its attractiveness.

Like Jaipur, Cochin on account of a robust tourism industry is also experiencing a surge in real estate activities. The South Indian city is also home to a thriving IT and agro based industry, which further adds to the demand dynamics.

Conclusions

Given the steeper growth trajectories which the tier II cities have registered in the recent past, it could be concluded that tier II cities are catching up with their metropolitan counterparts. Driven by rise in demand, property prices are appreciating fast. Nevertheless, it is essential to consider various factors before taking up an investment decision. It is important to consider the physical infrastructure and the future growth prospect of the city before undertaking a decision. Likewise, it is also important to consider a longer timeframe in order to realize highest capital gains. Since most of the cities are still upcoming, a short term investment decision might not be very beneficial.