How to evaluate a property in Tier-1 vs Tier-2 vs Tier-3 cities?

Before investing in the real estate market, buyers must have a sound understanding of the different markets, especially the classification of cities into Tier-1, Tier-2, and Tier-3 cities. All these cities are witnessing development at different levels, and a thorough understanding of property market trends will enable a buyer or investor to make better decisions. With most metro cities saturated, buyers are either looking to the suburbs or moving to smaller cities. Some tier-2 cities, which have the location advantages of being close to these metros, show stronger growth potential. Evaluating a property varies for different city tiers. In this guide, we explain the key factors buyers must consider when buying a property in a tier-1, tier-2 or tier-3 city.

Property price and affordability 

In real estate, property prices are a major factor that influences purchasing decisions. Homebuyers often set a budget for their property purchase and affordability is a prime concern for millions of Indians. Property prices are witnessing steady growth in top-tier cities such as Delhi-NCR, Mumbai, Bangalore, Chennai, Hyderabad, Pune, Kolkata, and Ahmedabad. These cities are also seeing growth in the premium or luxury property segment. This trend is driven by rising disposable income and evolving buyer lifestyle preferences. So, the Rs 1-2 crore segment has a significant contribution to the overall sales in key cities. 

Tier-2 cities, on the other hand, have undergone a significant transformation in recent years. Cities such as Jaipur, Coimbatore, Lucknow, and Chandigarh are attracting many property buyers owing to affordable property rates and strong growth potential driven by fast-developing infrastructure and a booming job sector. Even though property prices are appreciating in these markets, they remain affordable for most buyers. The property market in tier-3 cities, including smaller towns like Aligarh and Meerut, is also rising, with rates lower than in other prominent cities.

ROI and rental returns

There is consistent housing demand in top-tier cities due to a burgeoning population and the influx of people migrating from other cities. Investing in a residential property is likely to offer better returns as prices tend to appreciate more steadily. Similarly, the rental housing market also witnesses a steady growth due to the booming IT companies and other employment in these cities. 

Several tier 2 cities in India show a similar trend with emerging employment hubs and fast-developing infrastructure such as metro, expressway and airport projects. These cities have a higher potential for strong appreciation, mainly driven by growing demand, lower entry costs, and expanding infrastructure. Some cities, such as Lucknow and Chandigarh, have outperformed major cities, with double-digit appreciation of up to 10%. Likewise, tier-3 cities offer scope for real estate growth owing to greater land availability than in other cities; however, growth is relatively slower.

Resale potential

A key trait of a smart investor is investing in a property with strong resale potential, as it allows them to earn maximum returns on investment (ROI) and minimise losses. A property with high resale potential is likely to sell faster, allowing the investor to focus on other priorities. A property owner may decide to sell the property for job, family, or other personal reasons. Buying a property in a tier-1 city, especially in prime localities, guarantees strong resale potential due to constant demand. Moreover, these markets are mostly saturated, so the resale market contributes significantly to the overall market.  

When evaluating the resale value of properties in tier-2 cities, the location is a prime factor buyers must consider. Homes located close to bustling office hubs or upcoming infrastructure projects are likely to have a better resale potential than properties in other areas. With lower entry-level investment costs, properties in tier-3 cities also have higher long-term growth potential. At the same time, other factors, such as demand and location, will have a significant influence on resale values.

Location and connectivity 

Tier-1 cities are characterised by a robust road network and well-developed physical infrastructure. These cities have advanced airports and extensive public transportation network, allowing smooth last-mile connectivity to people. Besides, the infrastructure is witnessing continuous expansion, with new metro links, airport expansions, and major road and expressway projects that aim to boost regional connectivity. These factors positively impact the property prices and resale value. 

Buyers often check whether the properties they are buying are close to flyovers, expressways, the metro network, or airports. Good connectivity increases the investment potential. Tier-2 cities are also emerging as prominent urban centres with rapidly expanding infrastructure. The connectivity may be less extensive than in top-tier cities, with limited international airport facilities and connectivity options. Compared to the other major cities and emerging tier-2 cities, infrastructure in tier-3 cities is still in the development stage with limited connectivity benefits.

Economic growth and development

The top tier cities are recognised as global economic centres, contributing significantly to the country’s GDP. The presence of global companies, manufacturing hubs, and bustling corporate hubs attracts large numbers of working professionals, driving housing demand. Economies in some key tier-2 cities are witnessing growth driven by traditional industries, tourism, and manufacturing hubs, as well as an emerging education and startup ecosystem. A noteworthy trend in tier-2 cities such as Coimbatore and Kochi is the emergence of niche markets, including retirement homes and senior living. The short-term rental market is also booming in cities with a strong tourism sector. Economic development in tier-3 cities is mainly driven by local, small-scale businesses and tourism-based activities.

Lifestyle amenities and sustainability

Tier-1 cities are often known for their high cost of living, with people mostly preferring access to modern amenities. This demand drives the growth of gated housing projects. Furthermore, there is a growing awareness of sustainability. Buyers’ preference for green homes with the use of smart technology features is a major shift the real estate market has seen in recent years. Compared to the big metro cities, the cost of living in tier 2 cities and tier 3 cities is relatively lower. Although some tier-2 cities are also seeing a gradual shift towards a gated-community lifestyle, as demand from urban dwellers migrating to these cities continues to rise. Development in tier-3 cities is relatively slow, and the market has yet to catch up with modern trends.

Housing.com News Viewpoint

Property purchase involves careful due diligence on the part of a buyer. With the implementation of RERA in most states, real estate developments are streamlined, and buyers’ interests are safeguarded due to the strict regulations in place. Nevertheless, to ensure a profitable investment, a buyer must closely monitor the market and make a sound decision based on research. When evaluating a property across Tier 1, Tier 2, and Tier 3 cities, a buyer needs a fair understanding of how factors such as affordability, the economy, infrastructure, and lifestyle preferences can impact the property market and shape key trends. 

Tier 1 cities offer stability and assured returns, but investment costs may be higher than in other cities. Smaller towns and tier 3 cities may offer long-term investment opportunities, but only in limited pockets, as these cities are still developing. Compared to these two markets, tier-2 cities offer a middle ground and show higher growth potential due to expanding infrastructure and job markets. Ultimately, a decision must be based on one’s personal investment goals—whether affordable homeownership or long-term investment potential.

FAQs