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Why tier-2 and tier-3 cities are staging a comeback in real estate

Why tier-2 and tier-3 cities are staging a comeback in real estate

Why tier-2 and tier-3 cities are staging a comeback in real estate
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By Anuj Puri  Apr 3, 2018 9:34:50 AM IST (Updated)

Under the incumbent governments, a significant infrastructure deployment is happening in several of these cities.

After a protracted period where interest for real estate investment was concentrated primarily in the larger cities, we are now seeing a resurgence of the tier-2/3 story in India.

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Many of these cities are seeing increased economic activity and infrastructure growth, to some extent reducing the outward migration to the metros. This is a welcome development, which will eventually result in a more uniform spread of real estate demand across the country, and reduce the pressure on the larger cities.
The value of residential properties in tier 2 and tier 3 cities and towns start from a significantly lower base, owing to cheaper land prices and also the fact that developers active there are more aligned with affordability. Buyers tend to be more cost-sensitive as economic drivers in the city may not be on a par with those in the larger cities.
Help From ‘Smart Cities’
That’s not all. Under the incumbent governments, a significant infrastructure deployment is happening in several of these cities. Quite a few have come under the Smart Cities programme, which bodes very well for their real estate markets.
With increasing demand, one can expect prices in these cities and towns to move gradually upward. Price growth will be higher and faster in cities coming under the Smart Cities programme. This would indicate that potential buyers should not delay their purchase decisions indefinitely because the lower existing base currently provides the ideal entry point, especially for price-sensitive ones.
The ability of a smaller city to offer good options for investment depends on the kind of economic drivers are already in place and if they are expected in the short-to-mid-term.
Definitely, accelerated infrastructure activity in a particular city or town indicates that price growth will be healthy going forward.
Investors need to study each market for its growth prospects, including rental demand and capital appreciation trends as well as expected employment growth. A number of larger players have now expanded into tier-2 and tier-3 cities on the back of increasing demand for quality residential offerings there.
Investors will always be driven by an investment rationale, as well as their own knowledge and preference of some markets over others. Investors with better capitalisation may wish to focus on the larger cities, depending on their risk appetite while others would be more interested in India's reviving tier 2/3 story.
Larger Playing Field
That said, not all tier-2 and tier-3 cities are performing uniformly well, though it is true that supply will generally follow demand. In other words, cities that are performing well economically will attract more migrant population, which will need rental housing.
Simultaneously, local home-buyer sentiment will also be higher in such a city. Both investors and end users would have a very decent inventory to choose from, which enables them to fine-tune their final choices according to location, amenities and ticket sizes. At the end of the day, end users will purchase homes in their cities of residence, or in the case, of NRIs, in their cities of origin. Investors obviously have a much larger playing field.
 Anuj Puri is chairman of ANAROCK Property Consultants.
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