In recent years, tier-II cities in India have emerged as attractive alternatives to major urban centers like Delhi, Mumbai, and Bangalore. With affordable housing, growing employment opportunities, and improved infrastructure, many investors are turning their attention to these cities. However, before you dive in, it’s essential to assess two key factors: job prospects and infrastructure. These elements directly influence the demand for housing and, consequently, the potential for capital appreciation and rental income. This article explores why these factors are crucial when investing in tier-II cities and what you should look for before making any real estate decisions.
The weighted average price of newly launched real estate projects in the top 30 Tier-II cities has increased by as much as 65% from December 2023 to October 2024, according to a recent report by PropEquity. This surge highlights the growing appeal of these cities as real estate destinations, but before making any investment, it’s essential to understand the nuances of this emerging sub-asset class.
Key Drivers: Employment and Infrastructure Growth
Tier-II cities are becoming increasingly attractive for real estate investment due to expanding job opportunities. “Many of these cities are seeing the development of IT parks, and several are emerging as industrial hubs,” says Santhosh Kumar, vice chairman of ANAROCK Group.
Another significant factor driving real estate demand is improved connectivity. “Airports have been established in many Tier-II cities, and the road networks have also seen considerable improvements, which have spurred demand for housing,” explains Samir Jasuja, founder and CEO of PropEquity. In addition, metro rail networks are being introduced in multiple cities, further boosting connectivity.
The lower cost of land in these cities makes them appealing to developers. Alongside this, rising aspirations are creating increased demand for quality housing, including luxury properties. “Demand for better housing options has surged,” Kumar adds.
India’s rapid urbanization will also contribute to growth in Tier-II cities. “By 2030, around 40% of the country’s population is expected to live in urban areas, which will create lucrative investment opportunities in Tier-II and III cities,” states Vimal Nadar, senior director and head of research at Colliers India.
Moreover, Tier-II cities provide more room for development due to their lower real estate prices. “With prices being lower, these cities offer more potential for growth,” says Kumar. This allows investors to enter the market with smaller investments, making it an attractive option.
Not All Tier-II Cities Are the Same
However, it’s essential to approach these cities with caution. “Not all Tier-II cities are experiencing the same level of employment generation, infrastructure development, or connectivity improvement,” warns Jasuja. Price appreciation will differ from one city to another.
Between 2019 and 2024, property prices in several Tier-II cities have doubled. “This rapid rise in prices may lead to slower growth in some cities in the near future,” Jasuja notes.
Kumar also highlights the risks posed by geopolitical events and economic slowdowns, which could negatively affect these markets. Additionally, supply challenges exist. “Gated community projects are limited in many Tier-II cities,” says Jasuja, while Nadar warns about the potential risk of substandard construction quality.
Conducting a Top-Down Assessment
To make a sound investment decision, begin by evaluating the potential of the city. “Assess whether it has the potential to emerge as a hub for IT, manufacturing, or education,” suggests Jasuja.
Kumar recommends focusing on cities with ongoing or upcoming infrastructure projects, such as airports, road improvements, and metro developments. “Invest in cities that are part of government plans to be transformed into smart cities,” adds Abhishek Kumar, a Sebi-registered investment advisor and founder of SahajMoney.
Next, assess the demand-supply dynamics in the locality you are interested in. Oversupply can significantly limit price appreciation. “Track demographic changes, government policies, and the timelines of key infrastructure projects that may influence the area’s growth potential,” advises Nadar.
Finally, carefully evaluate the project and the developer. Kumar suggests investing in projects located near major work hubs, educational institutions, and other amenities that add value. “With fewer reputable developers in these cities, it’s crucial to conduct thorough due diligence, especially regarding property titles,” cautions Kumar from SahajMoney.
Nadar stresses the importance of verifying the legitimacy of the project, including ensuring registration and approvals from the Real Estate Regulation and Development Authority (RERA). Additionally, he recommends checking the financial stability of the developer to prevent delays or project failures.
For a safer bet, Kumar from SahajMoney advises investing in ready-to-move-in properties. “This eliminates the risk of development delays and enables investors to start monetizing their asset quickly,” he says.
By thoroughly assessing these factors, investors can make informed decisions and minimize risks in the growing Tier-II city real estate market.
Why Invest in Tier-II Cities?
Tier-II cities, often referred to as emerging cities, are rapidly becoming viable options for both homebuyers and real estate investors. Unlike saturated metro areas, these cities offer affordable property prices, making homeownership more accessible. Moreover, with improving job prospects, particularly in industries like IT, manufacturing, and services, the demand for housing is on the rise.
However, the key to a successful investment lies in understanding what drives this demand. The two most important factors are job prospects and infrastructure. Let’s break down each one to understand how they impact the housing market.
Assessing Job Prospects in Tier-II Cities
A city’s job market is a major driver for housing demand. As more companies set up offices, manufacturing units, and tech hubs in tier-II cities, the job opportunities increase. But not all cities have the same level of employment growth.
Key considerations:
- Economic Diversification: Cities with a diverse economic base offer more job security. Cities with a strong presence of multiple industries like IT, education, healthcare, and manufacturing have the potential for long-term job growth.
- Emerging Sectors: Look for cities where emerging sectors such as IT, e-commerce, fintech, and renewable energy are growing. These sectors often offer well-paying jobs and attract a skilled workforce.
- Skilled Labor Availability: A steady supply of skilled labor makes a city attractive to businesses, which in turn drives demand for housing.
Examples:
- Indore has grown as an IT hub with companies like TCS and Cognizant setting up offices, leading to an increase in both residential and commercial real estate demand.
- Chandigarh is an established city with growth in sectors like education, healthcare, and tourism.
Actionable Tip: Research job creation initiatives and the local economy. Look for sectors with high employment potential for sustained growth.
Infrastructure Development: A Key Driver of Housing Demand
Infrastructure is the backbone of urban development. Improved connectivity, better public transport, and upgraded social infrastructure such as schools, hospitals, and shopping centers are critical for making a city more livable and increasing housing demand.
Key factors to assess:
- Connectivity: Proximity to major highways, rail networks, and airports is crucial. Cities with strong transportation infrastructure attract commuters and businesses, increasing the demand for residential properties.
- Urban Planning: Efficient urban planning with well-designed roads, water supply, drainage systems, and green spaces can enhance the quality of life and make a city more desirable.
- Future Infrastructure Projects: Pay attention to upcoming infrastructure projects, such as metro rail expansions, expressways, or industrial zones, as they tend to boost property values.
Examples:
- Bhubaneswar has seen a boost in real estate due to its well-planned infrastructure, including the development of a smart city project and enhanced road networks.
- Jaipur has benefited from infrastructure development like the Jaipur Metro and international airport, improving connectivity and attracting investments.
Actionable Tip: Look for cities with ongoing or upcoming infrastructure projects, as these often indicate future property appreciation.
Balancing Affordability with Growth Potential
One of the main attractions of tier-II cities is affordability. Property prices in these cities are significantly lower than in major metros, making them an ideal option for first-time homebuyers and investors looking for budget-friendly options.
However, while affordability is a major draw, it’s important to balance it with the potential for growth. Cities that combine affordability with robust job prospects and infrastructure developments offer the best returns in the long term.
Key considerations:
- Price Appreciation: Look for cities with a steady increase in property prices due to infrastructure growth and job creation.
- Rental Yields: Cities with a growing workforce or student population may offer attractive rental yields, making them good for investment properties.
Risks and Challenges in Tier-II Cities
While tier-II cities have tremendous potential, there are risks to consider. Not every city is poised for growth, and many may not have the infrastructure or economic diversification necessary to sustain long-term demand for housing.
Key challenges include:
- Slow Economic Growth: Some tier-II cities may be too reliant on a single industry, making them vulnerable to market shifts.
- Infrastructure Delays: Projects that are delayed or poorly executed can diminish a city’s appeal.
- Population Migration: While many cities are attracting new residents, some might see out-migration, leading to a lack of demand for new housing.
Actionable Tip: Conduct a thorough analysis of the city’s economic diversification, population trends, and infrastructure pipeline before investing.
Conclusion
Investing in housing in tier-II cities offers unique opportunities, but success depends on careful analysis. Focus on cities with strong job prospects in emerging sectors, solid infrastructure development, and growth potential. While affordability is a major benefit, balancing it with future growth opportunities is key to maximizing returns.
By evaluating job opportunities and infrastructure carefully, investors can make informed decisions that lead to profitable and long-term investments in tier-II cities.
FAQs
1. What factors should I consider before investing in tier-II cities?
Focus on job prospects, infrastructure development, and future growth potential before investing.
2. Are tier-II cities good for real estate investments?
Yes, they offer affordable properties, and growing job markets and infrastructure developments boost property values.
3. Which tier-II cities have strong job prospects?
Cities like Indore, Jaipur, and Chandigarh have strong job prospects due to diverse industries and job creation.
4. How does infrastructure affect housing demand in tier-II cities?
Better connectivity, urban planning, and public infrastructure drive demand for housing and increase property values.
5. What are the risks of investing in tier-II cities?
Risks include slow economic growth, delayed infrastructure projects, and potential out-migration of the population.
6. Can I expect good rental returns in tier-II cities?
Yes, cities with growing workforces and student populations often offer attractive rental yields.
