Tier-2 Market- A Dark Horse In The CRE Space

Tier-2 cities are seeing a rise in commercial activity because of their overall affordability, stability in the economy, variety of options, and lack of real estate competition. This trend looks set to continue with the expansion of infrastructure and construction along metro pathways. 

Commercial development in Tier 2 and Tier 3 cities has increased as a result of an upsurge in the cost of commercial real estate in metro cities.  The trend towards entrepreneurship and the demand for affordable spaces have also contributed to the growth.

What are Tier 2 Cities?

Tier 2 cities are defined as having a population between 50,000 and 100,000 and having good access to major cities, rural areas, and semi-urban areas. These cities offer better quality of life, cheaper cost of living, more growth potential, and soon to be developed infrastructure. In addition, they are building business hubs, residential and commercial buildings, healthcare and educational facilities, and other facilities in industrial zones. Tier 2 cities are becoming more well-known due to their quick urbanization and economic expansion, even though they may not be as well-known as Tier 1 cities on a worldwide scale.

The Rise of Tier-2 Cities :

Tier-2 cities are emerging as the new hubs of growth and development as a result of the nation’s rapid urbanization. The population of Tier-2 cities has increased by 15% on average over the previous five years, according to a NAREDCO report, which has resulted in a sharp increase in demand for housing and rental services.

What factors make the tier-II markets a hotbed for real estate activity?

India’s Tier-II cities are anticipated to be the growth engines because of improvements in the quality of life, sustainability, business environment, and real estate market. Let’s examine the few factors that are driving these cities’ CRE growth.

• In Tier-II economies, the pandemic acted as a trigger and markedly raised levels of commercial activity.
• Increased income potential for real estate developers as a result of lower land costs.
• Escalating real estate costs yet remaining significantly below those of the leading ten urban centers.
• Cost Advantage: In general, Tier II cities have lower real estate and operating costs than Tier I cities. A company’s bottom line may be greatly impacted by this cost advantage, which makes expanding into these cities financially attractive.
• Market Potential: Untapped markets and consumer segments are available in Tier II cities, which could drive growth for firms. Compared to more crowded Tier I markets, it might be easier for businesses to establish a dominant market position in these cities.
• Diversification Strategy: In order to reduce the risks associated with an excessive dependence on a single location, businesses usually aim to diversify their geographical presence as they grow. Tier II cities provide an opportunity for diversification.

Factors driving the tier-II markets’ unprecedented growth for commercial development

The tier-2 cities that connect the industrial corridors are experiencing a surge in demand for commercial real estate for a variety of reasons.

According to a Cushman and Wakefield report, the country is predicted to urbanise at a rate of about 36% this year and 50% by 2050. As a result, Focus will turn to tier-2 towns, which offer the benefits and development potential to be the next big real estate destination.

• As per the United Nations’ report on global urbanization, 37% of India’s population is expected to live in urban areas by 2025, indicating the growth of tier II cities.

• The widespread adoption of the ‘work from home‘ paradigm during the Covid-19 crisis has sparked a reverse migration wave.  As a result, employers are now looking for qualified workers in India’s rural areas rather than depending on the labor force to migrate to tier-I cities in search of employment.

For young people, getting a bigger house on the same budget seems like the smart move. Given that it produces a favorable return, it becomes more advantageous when one is seeking for long-term investment.

• A Pocket-Friendly Proposition: In Tier II cities, affordability plays a major role in the real estate market’s expansion. Property prices here are often more accessible compared to Tier I cities,  making it a viable option for a wider range of investors. In addition to drawing in individual buyers, this affordability aspect also catches the attention of real estate developers looking for new opportunities for expansion.

• Diverse Real Estate Offerings: In Tier II cities, the real estate market is changing to meet a variety of needs and preferences. Emerging real estate opportunities include mixed-use developments, residential and commercial buildings, and even industrial zones. This diversity not only fuels economic growth within the cities but also accommodates the changing lifestyle demands of the residents.

• The cost of conducting business per square foot is almost half that of tier-1 cities’ commercial areas.

• Logistics and warehousing will develop into the hub of investment close to industrial routes. Manufacturing facilities seek commercial space in tier-II cities in order to benefit from the first-mover differentiation strategy.

• Lastly, tier-II cities lacked independent engines of economic activity. For businesses, transport costs have always been an issue. But today’s bridge—the industrial pathways—helps small and medium-sized businesses continue to turn a profit.

Advantages of Investing in Tier 2 City’s Real Estate

• Economic Growth: Due to government initiatives to support regional development and a shift towards decentralization, Tier 2 cities are experiencing robust economic growth. These cities provide a friendly business environment, draw in new sectors of the economy, and offer plenty of job opportunities.

• Lower Costs: Compared to Tier 1 cities, Tier 2 cities offer lower land and property prices, making them more affordable for investors. This accessibility and the possibility of large profits make real estate investments in both residential and commercial spaces very appealing.

• Diversification: Investors will find Tier 2 cities more affordable than Tier 1 cities because they have cheaper land and property prices. This accessibility and the possibility of large profits make real estate investments in both residential and commercial spaces very appealing.

• High-Quality of Life: With less traffic, a cleaner environment, and easier access to amenities, Tier 2 cities usually offer a higher standard of living. These factors draw people and companies seeking a lifestyle that strikes a balance between urban conveniences and  a relaxed lifestyle.

Risks and Challenges of Investing in Tier 2 Cities

• Market Volatility: Due to new market dynamics and a smaller investor base than established Tier 1 cities, Tier 2 cities may experience more market volatility.

• Infrastructure Development: Even though infrastructure is getting better, some Tier 2 cities might still need to make significant investments in things like social infrastructure, utilities, and transportation. The potential for real estate investments to grow could be impacted by delays or insufficient infrastructure development.

• Economic Stability: Although Tier 2 cities are expanding, compared to Tier 1 cities, their economies might be more vulnerable to changes and outside influences. Prior to making investment decisions, investors should thoroughly consider the economic stability and diversification of these cities.

Tier 2 Cities: Future Prospects in India

The future of real estate in Tier II cities appears promising.The focus is gradually moving from the busy major cities to the developing potential of Tier-2 cities in the ever-changing startup ecosystem of India. According to the report, the country is rapidly urbanizing, with the urbanization rate increasing from 32% in 2013 to 36% in 2023. This is shifting attention to areas  with the potential to grow and benefit from being the next big real estate destinations.

The future prospects of Tier 2 cities in India remain promising. These cities are anticipated to experience consistent economic growth, infrastructural development, and rising real estate demand as the emphasis moves beyond metropolitan areas. Their potential for growth is influenced by a number of factors, including decentralization of industries, favorable investment policies, government initiatives like “Smart City” projects, and improved connectivity. 

They are also appealing to investors due to the availability of inexpensive land, less competition, and comparatively lower property prices when compared to Tier 1 cities.

Bottom Line

The top Tier 2 cities in India have favorable economic growth, infrastructure development, and high quality of life, making them attractive for residential and commercial investments. They provide a blend of growth, potential, affordability, and quality that is difficult to find in Tier 1 cities. 

Before making an investment, you must, however, carefully consider the risks and difficulties related to investing in Tier 2 cities and carry out extensive research. Before making an investment in these cities, you should conduct thorough research and due diligence, taking into account the property’s location, supply and demand, price, returns, risks, and future potential.

As investors diversify their portfolios and expand their horizons, these smaller cities are set to play a pivotal role in shaping the future of real estate investment in the country.

Assetmonk is one of India’s best alternative investment platforms that provides investors with exceptional alternative investment choices backed by real estate. An assured Internal Rate of Return (IRR) of 17% is offered by the asset-backed investment products. A seamless exit plan is also guaranteed for investors. 

These investment opportunities are carefully selected from India’s thriving private markets and are overseen by a trustee registered with SEBI.   The interest earned is taxable, but there is a bright side: investors may be eligible for tax benefits of up to Rs 50,000, which gives them the opportunity to invest with ease and earn attractively high returns.  With a minimum investment of just 10 lakhs, you can enjoy the advantages of stress-free investing and attractive high returns.

FAQs

Q1. Why are Tier 2 cities gaining popularity among real estate investors?

A. Because of their lower real estate costs and better infrastructure, Tier 2 cities are growing in popularity among real estate investors. These cities offer a promising growth trajectory, making them attractive investment destinations.

Q2. What role does affordability play in the preference for Tier 2 and Tier 3 cities?

A. The attraction for Tier 2 cities is largely driven by affordability. These smaller cities with affordable property prices are more attractive to investors than major cities where real estate costs are usually costly.

Q3. What is a good ROI for commercial real estate investment in India?

A. While the rental yield on residential real estate investments is only 2% to 4%, it can range from 5% to 12% for commercial real estate investments.

Assetmonk provides an assured IRR of 17% through it’s real estate structured debt offerings in the commercial real estate investment segment. 

Q4. What is the full form of CRE?

A. CRE stands for commercial real estate.