Housing in tier-II cities: Assess job prospects, infra before investing

Tier 2 cities are emerging as attractive real estate destinations due to expanding employment opportunities

The weighted average price of newly launched projects in the top 30 Tier-II cities surged by  up to 65 per cent between December 2023 and October 2024, according to a recent report by PropEquity. Before investing, one must understand the nuances of this emerging sub-asset class.

  Key drivers: Employment, infra growth

  Tier-II cities are emerging as attractive real estate destinations due to expanding employment opportunities. “Many of them are witnessing the development of information technology (IT) parks. Some are developing as industrial hubs,” says Santhosh Kumar, vice chairman, ANAROCK Group. 

Improving connectivity is another major driver. “Airports have come up in many Tier-II cities. The road network has also improved vastly, creating demand for real estate in these cities,” says Samir Jasuja, founder and CEO, PropEquity. Several cities have also introduced Metro rail networks. 

 

Lower cost of land in Tier-II cities makes them appealing  to developers. In addition,  aspirations are rising. “Demand for quality housing, including luxury options, has surged,” adds Kumar.

  India’s rapid urbanisation will further boost prospects. “By 2030, around 40 per cent of the country’s population is expected to live in urban areas. This trend will offer lucrative opportunities for investment in Tier-II and III cities,” says Vimal Nadar, 

senior director and head of research, Colliers India.

  Tier-II cities also offer a longer runway for development. “Real estate prices tend to be lower there, which leaves more room for growth,” says Kumar. Investors can enter these markets with a smaller corpus. 

  Not all Tier-II cities are equal

  Investors must approach these cities with caution. “Not all of them are witnessing employment generation, infrastructure growth, or connectivity improvements to the same degree. Price appreciation will vary,” says Jasuja.

  Between 2019 and 2024, prices in many Tier-II cities have doubled. “This could lead to a moderation in price growth in some of them in the near future,” adds Jasuja. 

Kumar warns of risks posed by geopolitical events and economic slowdowns. Supply challenges also exist. “Gated community projects are limited in most Tier-II cities,” says Jasuja. Nadar cautions about the risk of poor construction quality.

  Do top-down assessment 

  First, evaluate the city’s potential. “Find out if it is likely to emerge as an IT, manufacturing, or education hub,” says Jasuja.

  Kumar advises focusing on cities with significant infrastructure development, such as airports, roads, and metro projects.

  “Go for a city which the government plans to transform into a smart city,” says Abhishek Kumar, Sebi registered investment advisor (RIA) and founder, SahajMoney. 

Second, assess the demand-supply dynamics of the locality you are keen on. Oversupply can limit price appreciation.

“Monitor demographic shifts, government policies, and timelines for key infrastructure projects that could influence the area’s prospects,” says Nadar. 

Finally, evaluate the project and the developer. Kumar of ANAROCK suggests investing in projects near workplace hubs, educational institutions, and other value-adding facilities. 

“As fewer reputed developers are available, one needs to be extra careful with due diligence of property titles,” says Kumar of SahajMoney. 

Nadar emphasises verifying the project’s legitimacy, including registration and approvals from the Real Estate Regulation and Development Authority. He also suggests checking the developer’s financial soundness to avoid project delays or failures.

  Kumar of SahajMoney suggests buying a ready-to-move property so that development risk is eliminated and inve­stors can monetise the asset quickly.