Life Beyond Metros: Tier 2 Cities Are a Long-Term Opportunity

December 10, 2024: By Sunil Pareek, Executive Director, Assetz Property Group

India’s real estate market has traditionally revolved around metro hubs like Mumbai, Delhi NCR and Bengaluru. As these cities face increasing challenges such as urban congestion, rising living costs and infrastructure strain, Tier 2 cities like Coimbatore, Jaipur and Lucknow are stepping up. With India striving for a $7-trillion economy by 2030, these cities hold significant promise despite interim trends reminding us that these are smaller evolving markets with their own set of dynamics.

Why do Tier 2 cities remain a compelling opportunity for developers, even amid supply-demand fluctuations seen in recent quarters? How can strategic entry into these markets yield long-term benefits?

Key Drivers for the Focus on Tier 2 Cities

Urban population growth in India has risen from 31 per cent in 2011 to almost 40 per cent and is expected to reach 45 per cent  by 2035. With metros like Mumbai and Chennai struggling with high population densities even exceeding 18,000 people per square kilometrw, Tier 2 cities offer a chance to redistribute growth and reducing congestion and resource challenges. Tier 2 cities offer an alternative to promote balanced urbanization.

Cities like Surat, Ahmedabad, and Coimbatore are among the fastest growing in terms of GDP contributions. Surat has experienced remarkable growth driven by its diamond and textile industries, while Coimbatore thrives as a hub for small and medium enterprises (SMEs) and Kochi as a trade and IT hub. These cities are emerging as critical engines for India’s economic growth. These are the cases for many Tier 2/3 cities with their unique trades, industries and economic drivers.

Rising land and living costs in metros have made housing unaffordable for many. Tier 2 cities provide a viable alternative, offering affordable housing and better quality of life, making them increasingly attractive to middle-income buyers.

Government-led projects like the Smart Cities Mission, NHAI road initiatives, and UDAN, have significantly improved accessibility and livability in Tier 2 cities. The expansion of metro systems in cities like Nagpur and Kanpur, along with greenfield airports in Bhopal, has further boosted connectivity and local economies.

Policies like AMRUT (Atal Mission for Rejuvenation and Urban Transformation) and the Smart Cities Mission are channelling investments into sustainable urban development. These initiatives are not only enhancing urban living but also attracting private investments into Tier 2 cities.

Setting up operations in Tier 2 cities offers 10-30 per cent cost savings on rent and labour compared to metros. This has encouraged businesses, including GCCs, to expand to cities like Mysuru and Ahmedabad, taking advantage of lower operational costs and strong talent availability.

Many professionals are returning to Tier 2 cities for family proximity, affordability, and improved quality of life. This trend has spurred real estate demand, further fuelled by aspirations for better housing and modern amenities.

Considerations for Developers in Tier 2 Cities

Residential sales in Tier 2 cities have surged by over 20 per cent in the past year, driven by affordability and job opportunities. However, in few quarters the growth has reduced as well indicating volatility in these markets which are at low base of scale today.

Buyers increasingly seek green spaces, community facilities, and modern amenities, with demand for premium housing rising alongside affordable options.

Affordable housing dominates, with nearly 60 per cent of buyers focused on this segment, supported by government incentives and lower land costs which will remain a small yet consistent demand.

Integrated developments combining residential, commercial, and recreational spaces are increasingly in demand in cities like Surat and Lucknow.

Infrastructure investments are projected to drive a 30-40 per cent  increase in housing demand over the next decade with some volatility in demand in between.

Strategies for Grade A Developers

> Launch smaller projects or plotted developments to test demand before scaling up investments.
> Work with local developers or consultants for regulatory, buyer behaviour and market insights.
> Focus on affordable and mid-segment housing while ensuring flexibility to adapt to changing buyer preferences.
> Target areas with strong infrastructure growth and proximity to transport hubs.
> Secure clear land titles, adhere to RERA norms and maintain financial buffers for delays or unforeseen challenges.

Opportunity for Real Estate Diversification

Tier 2 cities play a crucial role in balancing India’s urbanization and economic expansion. While their overall market size at under 1,00,000 – 1,50,000 units may appear small compared to metros early entry through one or two strategically planned projects a year or two can position developers for success as these markets mature.

The key lies in balancing optimism with pragmatism. Developers may approach these cities not just as new frontiers but as evolving markets where careful planning and adaptability are essential. By aligning with local demand and leveraging policy and infrastructure growth, Tier 2 cities can become meaningful contributors to India’s real estate story, even amid interim volatility.