DRIVING the NEXT WAVE
Tier 2 cities are growing faster with more population expected to migrate to cities from rural areas in the coming years. Construction Times finds out the emerging real estate trends in the tier 2 city markets and the outlook.
India’s real estate market has seen exponential growth in the past years with most of the developments centred around the metro cities in the country. Cities like Mumbai, Delhi NCR, Bengaluru, Chennai and Kolkata witnessed emergence of landmark projects coming up in the past. However, currently these cities are getting saturated for larger developments due to depleting space availability. This has opened up new avenues of growth for tier 2 cities.
Advantages of tier 2 cities
The developers are now looking for smaller cities for expansions. As urbanisation is growing in India with more people moving from rural areas to urban regions looking for job opportunities and better living, they are preferring tier-2 and tier-3 cities for better and affordable living. This has brightened the future demand of these cities and their developments.
The major advantages that drive the real estate market development in tier 2 cities are competitive real estate costs, rapid infrastructure development, lower operating costs, and an abundance of talent pool.
In spite of the developments happening, tier 2 cities are still affordable compared to tier 1 cities. People can buy luxury properties at affordable price range in these cities and enjoy the fresh environment at lesser cost. Real estate in tier-2 cities has garnered interest in the recent past as luxury properties and villas are available at 20-30% cost compared to similar properties in tier-1 cities. As per a recent industry survey, nearly 30% of investors are inclined towards tier-2 cities for their purchase of luxury properties due to lower land costs and higher returns.
Also, infrastructure and connectivity are improving with many government programmes are focusing on the overall infrastructure development. Several government initiatives such as highway and expressway developments under Bharatmala, port connectivity projects under Sagarmala, urban infrastructure development under smart city initiatives, air connectivity with smaller cities under UDAN scheme, high-speed rail projects such as the Mumbai-Ahmedabad bullet train project, dedicated freight corridors, and upcoming metro rail projects are improving the connectivity and providing impetus to the real estate sector in these cities.
Under the UDAN scheme, a total of 86 aerodromes have been operationalized enhancing regional air connectivity from unserved and underserved tier-2 city airports. This has made air travel affordable and accessible for all. Also, Railways launched 41 Vande Bharat trains to improve the connectivity of tier-2 cities with tier-1 cities. The government has also planned to expand Kochi port to improve the docking of large vessels at the port. These upcoming mega infrastructure projects are likely to improve intracity and intercity connectivity, boosting the economic profile of tier-2 and tier-3 cities.
Commercial real estate trend
The growth in infrastructure and connectivity coupled with the affordability of land and peaceful living is pushing the office real estate market growth in tier 2 cities. Reverse migration of working professionals also resulted in an increase in demand for office spaces in tier-2 and tier-3 cities. Shrinivas Rao, FRICS, CEO, Vestian, elaborates, “To fulfill the sudden increase in the demand for office spaces, several co-working players expanded their footprint in these cities. Awfis, Indiqube, Incuspaze, Regus Spaces, and MyBranch together have more than 140 co-working centres spread across tier-2 and tier-3 cities. Furthermore, tier-2 cities have more than 80 mn sq ft of office stock with an upside potential of crossing 100 mn sq ft in the next 4-5 years.”
As per foundit, tier-2 cities witnessed 11% increase in hiring in 2024 compared to the previous year with Kochi, Coimbatore, and Jaipur emerging as key hiring locations. The establishment of new companies and expansion of existing firms to accommodate new hires is likely to contribute significantly to office demand in these cities.
Several large MNCs expanded their footprint to these cities to tap local talent and reduce their real estate and operational costs. These companies chose to lease co-working office spaces initially to test new markets, which resulted in a rise in the demand for co-working spaces. Furthermore, tier-2 cities have more than 80 mn sq ft of office stock with an upside potential of crossing 100 mn sq ft in the next 4-5 years. As more and more companies expand their footprint to tier-2 and tier-3 cities, the scope for commercial real estate widens in these cities.
Future market opportunities
As per the World Bank, India’s towns and cities are expected to be home to 600 million people (40% of the population) by 2036, up from 31% in 2011. To accommodate this growing population, tier-2 and tier-3 cities are expected to expand their city boundaries which may result in higher growth in city peripheries.
With India aiming to become a developed nation by 2047, the government has taken up many infrastructure development activities in the country, while many are in the pipeline. This will be visible in the tier 2 cities as well in the coming years. According to Rao, government has approved the development of 12 new industrial smart cities with an investment of Rs 286 billion and three new railway lines to connect Odisha, Jharkhand, West Bengal, Chhattisgarh and unlock their potential. The government has also planned to build educational institutions in tier-2 cities to upskill local talent. Furthermore, metro rail projects in tier-2 cities (Agra Metro, Indore Metro, Jaipur Metro, Ahmedabad Metro, and Bhopal Metro) are under construction and expected to enhance intracity connectivity, once completed.
