Getting over the big cities for investors in real estate players is not easy but if a recent report released by CRISIL research, country’s largest independent rating agency, is to be believed, the sheer size of realty market of these ten tier-2 cities, Bhopal, Bhubaneswar, Coimbatore, Indore, Jaipur, Lucknow, Nagpur, Surat, Vadodara and Visakhapatnam is at whopping Rs 18,000 crore.
Though the leader of the pack is twice bigger than its nearest competitor in capital value terms. Leading the pack is the diamond enclave of the country Surat, with an average yearly sales of 7400 units with realisation of Rs 4000 crores, the nearest competitior is Jaipur with sales realisation of close to Rs 1900 crore and sales of 7500 units.
The real estate sector and financial institutions alike are now eyeing tier-2 cities for diversification since these offer huge growth potential and robust economic growth. Biggies like DLF, Unitech, Indiabulls Real Estate (IBREL), Parsvnath, Puravankara, Tata Realty, Reliance Urban Infra, Emaar MGF, Sobha Developers to name a few who are flocking these cities and launching projects with an average price band of Rs 2000-2700 per sft.
DLF, the largest realtor in the country according to market capitalisation has been actively entering the smaller cities and it has a presence in Bhopal, Indore, Lucknow, Bhubaneshwar.
Unitech has guided residential project launches in emerging markets like Kochi and Ambala this year. Unitech had launched total 10.8 msft in FY 11 of which 1.8 msft was launched in smaller cities and it managed to it sell 0.8 msft.
According to Prasad Koparkar, Head–Industry and Customized Research, CRISIL Research, “350 million square feet (msft) of residential construction will happen in FY 2011-2012 in these ten cities and it is driven by small scale developers who are contributing 90 % of the investment. The demand is local and not investor driven.” But the significant change in this new landscape is that large scale national developers are showing renewed interest and are buying small land parcels or reworking on the parcels that they had bought during the boom time with their initial public offering (IPO) money.
The diversification of national developers to tier-2 cities has been led by slowdown in cities like National Capital Region (NCR) and Mumbai. Even Chennai and Bangalore has started to show the peel effect.
In contrast, these tier-2 cities are less susceptible to market shocks and interest rate hikes as only 30% population in these smaller cities are availing loans to buy real estate vis-à-vis almost 70% in tier-1 cities, tells Mr. Koparkar.
The most burgeoning city is slated to be Lucknow and followed by Indore which would witness largest price hike owing to migrating population, shortage of land whereas industrial and elite salaried class propelling the demand, whereas Surat, Bhopal and Jaipur are expected to have higher supply.
