Real Estate Development in Top Tier 2 Cities of India

For all these years when we talk about the real estate sector or infrastructural development, it’s only the metropolitan cities like Mumbai, Delhi, Kolkata, and so on, that come to our mind, but in today’s times, the reality of real estate sector is completely different. Nowadays the shift of real estate towards Tier-2 cities is growing rapidly. With booming social infrastructure, the governments of respective states are also looking toward creating a revamped residential infrastructure in Tier-2 cities. Tier 2 cities are urban centers that are smaller than metropolises but are quickly increasing in terms of infrastructure, economic growth, and population. Cities like Lucknow, Ahmedabad, Jaipur, Kochi, Bhubaneswar, etc have experienced an increase in investment and are attracting real estate developers and investors. Improved connectivity, government efforts, urbanization, and a rising middle class wanting a higher quality of life are all factors contributing to their rise. 

Another factor that is leading to an improved Real Estate sector in Tier 2 cities, is growing pollution levels, and booming population in Metropolitan aka Tier 1 cities. This is driving home buyers to look towards Tier-2 zones.  Let us understand the real estate future for Tier 2 cities. 

Exploring real estate potential 

If we take a look at the real estate preferences of Tier 2 cities a few decades ago, higher priority was given to independent plots or houses. Also, it was a time when people were migrating to Tier 1 cities for new work and living opportunities they promised, which not only presented small cities as undesirable but rather pushed more and more people towards more prominent cities. This migration led to a neglect of development in Tier-2 cities. However, currently, the scenario has changed. The heavy outflow of people led to an active & targeted infrastructural development strategy. 

Currently walking in the footsteps of tier 1 cities, tier 2 cities are rapidly improving their social infrastructure, for example, residential properties, schools, hospitals, shopping malls, corporate offices, and so on. The connectivity infrastructure i.e., roads and transport connectivity in Tier 2 cities is growing immensely as well. And as the development is happening, the need for more and better residential and commercial spaces is booming. Even the governments are currently focusing on developing major Tier 2 cities as Smart cities with the aim of providing homes for all. Many state and center-sponsored schemes are being rolled out in the same direction. Furthermore, government policies and incentives like tax benefits, single-window clearance, and relaxation of FDI norms have made investing in tier 2 cities more attractive. These policies encourage developers and investors to tap into the growth potential of these emerging markets.

This is leading the city infrastructure to have a strategically developed infrastructure with a mix of Affordable housing, mixed-use developments, and industrial parks. The future of tier 2 cities’ real estate also comprises high-rise residential spaces including 2, 3 & 4BHK luxury apartments, splendid penthouses, and so on. Along with residential properties cities like Lucknow, Jaipur, etc are already comprised of stunning office spaces forming an impressive skyline of the cities on the lines of Tier 1 cities like Delhi, Gurugram, Mumbai, etc. 

Investment Potential

With all this development, any city is sure to attract a high influx of meaningful investments. So is happening with small cities as well. The rapidly growing infrastructure is attracting many prospective investors, in both residential and commercial sectors. This high investment influx will not only ensure better development, but also will lead to a lesser load on government reserves, and a higher standard of living for the residents. Future investments in such cities can be in the following ways:

 Residential investments: These are investors who are either interested in buying homes for living or leasing/selling. Tier 2 cities owing to their low pollution levels, better growth potential, and lesser crowd than metro cities are prime locations for any new home buyer.  Other than new home buyers, there are also the owners of old family lands and properties who have though moved to bigger cities, look for investors in their old homes. Flip investors show excellent interest in such properties. 

Commercial Investments: As we know, currently the property market is booming with commercial properties to match the Western ideals of workspaces. Therefore, all the corporate offices nowadays are looking to set up their functions in a location that not only has a better consumer vicinity but also a position among its top competitors. Other than corporate culture, one more concept that the Indian real estate market is following the Western world for is its booming capitalist preferences. Nowadays, huge shopping malls have become a norm, and these malls are an arena for international brands and companies to spread their market base in India. Therefore, another important aspect of commercial real estate investments is the shopping complexes. 

Challenges & Future Strategies

Although the future of real estate in Tier 2 cities appears to be bright and booming, with every growth comes certain challenges. These challenges although trying to pull back the development, also serve as an opportunity to learn and incorporate those learnings for a better tomorrow. Some of the challenges that the real estate market faces or will face in the future in Tier 2 cities are: 

 Infrastructure in line with urbanization: Often it is seen that in pursuit of rapid development, the balance between urbanization and basic infrastructure is overlooked. This creates an excessive burden on the existing infrastructure. Therefore it is necessary to first audit the region for proper facilities that aid stable development such as Adequate water supply, sanitation, continuous power supply, and transportation networks are vital for sustainable growth.

 Understanding local dynamics: This is another major concern that comes up when planning a real estate in Tier-2 cities. Although the lifestyle and development in Tier-1/Metro cities might seem alluring, in reality, it depends on its residents as well. Dwellers in Tier-2 cities often don’t prefer luxury homes, as even today the homeowners in small cities prefer their legacy homes or traditional houses rather than high-rise apartments. 

Financing Constraints: Among many other challenges of developing luxury real estate in Tier-2 cities are the financial limitations of the home buyers and investors. Often it is seen that even though there are a few small-scale luxury home developers in smaller cities, they tend to go into major loss due to the unavailability of buyers or their trust in builders. 
 
However, it is with consistent and gradual changes that the real estate transformation can be achieved in small cities. This obviously comes after proper strategy and planning. Real estate development in tier 2 cities of India presents a promising growth trajectory and investment opportunities. The combination of factors such as urbanization, infrastructure development, government initiatives, and a rising middle class contribute to the growth potential of these cities.

But another major reality is that however slow in infrastructural development, Tier-2 cities are sure to boom in the coming years. With overpopulation, high pollution levels, and diminishing career opportunities, the Indian home-buying class is looking toward Tier-2 as the next-gen economic powerhouse. Real estate development in these cities can play a pivotal role in shaping their growth story. Therefore, currently, it is a need to recognize the immense potential and overcome challenges through proper planning and risk mitigation.