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


Analysts believe that tier-2 cities will be the hotbed for future growth of the economy in general and the real estate market in particular

While companies across industries have realised the advantages of work-from-home (WFH) in the backdrop of the Coronavirus pandemic, there has been a major shift of the workforce towards tier-2 cities, where the cost of living is less, the work and life balance is better and housing remains affordable. 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.

 

Real estate in tier-2 cities

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

Advantages of tier-2 citiesDisadvantages of tier-2 cities
Decent infrastructure and connectivityPoor international air connectivity
Low pollution levelsLesser economic activity
Fewer traffic bottlenecksAbsence of MNCs
Moderate cost of livingFewer job opportunities
Better quality of life
Low real estate prices
Low cost of doing business

 

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.

 

FAQ

What is the meaning of Tier 1 and Tier 2 cities?

Tier-1 and tier-2 are classifications of cities, based on population density. The tier-1 cities are Delhi, Mumbai, Chennai, Kolkata, Bangalore, Hyderabad, Ahmedabad and Pune.

What are Y cities in India?

Tier-2 cities are referred to as ‘Y’ category cities.

Is Pune a tier 2 city?

Pune is a tier-1 city.

 

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