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Tier II and III cities: El Dorado for 25% of real estate investors

Written by The Optimist

 

The latest trends show that India’s smaller towns and cities are becoming smarter, even as the typical Indian’s desire to invest in real estate continues unabated…

ANAROCK’s recent edition of its Consumer Sentiment Survey confirms that investors are equally, if not more, upbeat on the prospects that India’s Tier-II and Tier-III smart cities offer. The past few decades saw developers concentrate on India’s metros and a majority of investments were channelled into such cities as New Delhi, Mumbai, Chennai and Bengaluru.

 

 

Anuj Puri, chairman, ANAROCK Property Consultants, recently told the media, “Tier II and III cities have emerged as the new investment hotspots, thanks to low property prices and improved infrastructure boosting their overall growth potential. Our survey confirms a 26% investor approval rating for Tier-II and III cities, with Bengaluru as the second-most preferred investment option with 21% votes.”

The infra link

With big metro cities bursting at the seams and new infrastructure hard to deploy there, Tier-II and III cities are throwing up enough scope for forward-looking infrastructure development to drive employment and, so also, capital and rental value appreciation.

The infrastructure thrust in these cities is also supported by government initiatives, such as Smart City and AMRUT projects. When fully implemented, these initiatives will have a huge impact on these cities’ real estate market. Already, many Tier-II and III cities offer higher rental growth prospects due to better job opportunities.

ANAROCK’s Consumer Sentiment Survey, H1-2019, indicates that almost 26% of all property investors prefer Tier-II and III cities. The favourite real estate investment hotspots among these smaller cities include Ahmedabad, Jaipur, Chandigarh, Nashik and Kochi. Bengaluru and Pune are the other favourite investment destinations, with 21% and 18% votes, respectively.

 

 

Investors are also now becoming more comfortable with betting on the real estate markets of other cities than the ones they live in. Besides, given the survey’s wide bandwidth of respondents, it is evident that non-metro cities’ real estate is attractive to investors with both big and modest budgets and risk appetite.

The reasons among all classes of investors remain uniform and present a compelling investment rationale:

  • Affordable property prices of these cities
  • Growing infrastructure and faster adoption of Smart City concepts

However, the survey also reveals that the smaller cities that Tier-I city-based investors prefer the most are those that are the closest to their cities of residence.

City-wise analysis

  • In Chennai, 21% of respondents want to invest in nearby Tier-II and III cities — Vellore, Coimbatore, Mahabalipuram and such others, followed by Bengaluru as a second choice
  • In Delhi-NCR, almost 12% prefer to invest in such nearby cities as Sonipat, Jaipur and Chandigarh, followed by Bengaluru and Mumbai Metropolitan Region (MMR).

 

 

But investors based in Tier-II and III cities present a sharp contrast — 40% of respondents from these cities prefer to invest in the top 7 cities:

  • 28% (Bangalore)
  • 25% (Delhi-NCR)
  • 17% (Pune)
  • 12% (MMR)

‘Smart Cities’ to boost growth

On the initial leg of this government-driven mission, the ‘Smart City’ tag allotted to several smaller towns and cities, itself, opened up opportunities in their respective real estate markets, with housing sales seeing some traction even during a lull period.

According to the ANAROCK data, Lucknow saw overall housing sales rise by 19% in 2018 against the previous year. Ongoing infrastructure developments, including the Metro deployment, increased connectivity to the national capital via the Agra Expressway and huge employment-driven inward migration from nearby smaller towns and villages boosted Lucknow’s housing market considerably.

Investors are also aware that more and more private equity investors have been turning their focus on Tier-II and III cities over the past four years. According to ANAROCK’s latest Private Equity (PE) report in Indian Real Estate, $1.37 billion were pumped into real estate markets across various smaller cities — including Bhubaneswar, Chandigarh, Ahmedabad, Mohali, Indore and Amritsar — between 2015 and 2018.

Given that PE players have matchless due diligence protocols, it is fairly easy to ‘follow the leaders’ as they tap into the potential of India’s forthcoming real estate goldmines.

 ‘New highs for old lows’

‘Tier-II and III cities have emerged as the new investment hotspots, thanks to low property prices and improved infrastructure boosting their overall growth potential’

  • Anuj Puri, chairman, ANAROCK Property Consultants

The driving forces

  • Implementation of RERA and lower GST revive consumer faith in new launches
  • Low prices attracted over 50% home-buyers to purchase property in 2018; almost 52% likely to buy with same developer again
  • Bengaluru saw 44% respondents buy homes for investment
  • About 70% prospective buyers want properties under Rs80 lakh

About the author

The Optimist

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