Hidden Potential of Tier 2

All about the Hidden Potential of Tier 2 Cities like Indore – the New Real Estate Frontier!

In India, cities are commonly categorized into different tiers based on multiple factors such as the size of the population, level of economic activity, available infrastructure, and development status. The classification may not be officially recognized and can vary depending on the context and the criteria employed, but it serves as a general guideline to differentiate between various urban centres.

This categorization is often used by government bodies, businesses, and researchers to understand the diversity and complexity of India’s urban landscape. The factors considered for classification include the presence of airports, railways, and highways, the availability of basic amenities like water and electricity, healthcare facilities, educational institutions, and the overall level of economic growth and prosperity. This categorization has helped policymakers identify the needs and priorities of different urban centres and formulating targeted policies and programs for their development.

How to classify the Tier 1 or Tier 2 city in India?

In India, the concept of Tier 1, Tier 2, Tier 3 and Tier 4 cities is not officially codified by the government but rather is a classification that is commonly used in various contexts such as business, marketing, real estate, and urban planning. Typically, Tier 1 cities are the most developed urban centres with the highest population density, economic activity, infrastructure, and standard of living.

The classification criteria of Tier 1 cities can be based on various factors, such as:

• Economic activity and job opportunities: High concentration of industries, services, and headquarters of large companies.
• Population: Tier 1 cities usually have a large population with high density in comparison to Tier 2 or Tier 3 cities.
• Infrastructure: Well-developed transport, healthcare, and educational facilities.
• Cultural significance: Often these cities have historical importance and a vibrant cultural scene.
• Real estate prices: Property prices and cost of living tend to be higher in Tier 1 cities.

Tier 1 cities in India often include:

1. Mumbai (Maharashtra): Known as the financial capital of India, it is home to the Bombay Stock Exchange and Bollywood.
2. Delhi (NCR): The national capital with significant political and cultural influence.
3. Bangalore (Karnataka): Considered the Silicon Valley of India, it is the nation’s leading IT exporter.
4. Kolkata (West Bengal): A major port city and commercial hub in eastern India.
5. Chennai (Tamil Nadu): A major industrial and cultural centre, especially notable for the automobile industry.
6. Hyderabad (Telangana): Another major IT hub with a fusion of historical heritage and modern industry.
7. Pune (Maharashtra): The city has witnessed rapid growth in the IT sector and is home to many national and multinational IT companies
8. Ahmedabad (Gujarat): Known for its entrepreneurial spirit and has been a major centre for trade and commerce in western India.

There is no strict definition, and the list of cities considered as Tier 1 can change over time due to economic growth, development of infrastructure, urban expansion, and other socio-economic factors. Moreover, it’s important to note that while these classifications are useful for certain types of analysis, they do not capture the full diversity and complexity of India’s urban landscapes.

What are the major challenges in real estate investment in tier 1 cities of India?

Investing in real estate in Tier 1 cities in India, like Mumbai, Delhi, Bangalore, Chennai, Kolkata, and Hyderabad, can be lucrative, but it comes with its own set of challenges and risks. Here are some adverse issues commonly associated with real estate investment in these cities:

• High Entry Cost: Real estate prices in Tier 1 cities are generally very high due to high demand and limited supply, making initial investment more difficult for average investors.

• Low Rental Yields: Compared to the high property prices, the rental yields (annual rent as a percentage of property value) in many parts of Tier 1 cities are relatively low. This can make it hard for investors to generate significant cash flow from rental properties.

• Market Saturation: The real estate market in many Tier 1 cities might be close to saturation, leaving limited scope for price appreciation. New developments may face stiff competition, and investors may struggle to find properties with strong growth potential.

• Liquidity Issues: Selling a property in Tier 1 cities can sometimes be time-consuming due to the high prices and lower number of potential buyers who can afford such investments, leading to liquidity issues.

• Regulatory Challenges: Indian real estate especially in Tier 1 cities is subject to numerous regulations, which can be a complex and time-consuming hurdle for investors. These may include laws related to land acquisition, zoning, building approvals, and environmental clearance.

• Risk of Slum Developments: In several Tier 1 cities, there is a risk associated with slum encroachments on vacant land, which can complicate development plans and present legal challenges.

• Infrastructure Issues: Despite being more developed, many Tier 1 cities still grapple with challenges like traffic congestion, water scarcity, power outages, and inadequate waste management, which can affect the desirability and value of real estate investments.

• Economic Fluctuations: Economic slowdowns can lead to decreased demand for both commercial and residential properties, impacting rent and property valuation.

• Speculative Activities: Real estate markets in Tier 1 cities often see speculative buying, which can inflate prices and create bubbles that eventually burst, leading to steep market corrections.

• Environmental Considerations: Some Tier 1 cities are more prone to environmental issues such as flooding, which can affect certain regions adversely— for example, parts of Mumbai during the monsoon season and smog and pollution in NCR during the winter season.

Investors considering real estate in Tier 1 cities of India should perform rigorous due diligence, understand local market dynamics, seek professional advice, and be prepared for a long-term investment horizon to mitigate some of the risks mentioned above.

Why tier 2 cities are attracting real estate investors in 2024?

Tier 2 cities are the next level of urban centers, which are not as large or economically influential as Tier 1 cities but still have significant growth potential and relatively developed infrastructure. Examples of Tier 2 cities in India could include cities like Jaipur, Lucknow, Kochi, Indore, Coimbatore, Visakhapatnam (Vizag), Bhubaneswar, and Chandigarh.

These cities are attractive to real estate investors for a number of reasons:

1. Growth Potential: Tier 2 cities are often in a phase where there is significant scope for economic growth and urban development. This presents an opportunity for real estate values to appreciate over time.

• Lower Prices: Real estate prices in Tier 2 cities tend to be lower compared to Tier 1 cities, making them more accessible to a wider range of investors.

• Infrastructure Development: Many Tier 2 cities are undergoing rapid infrastructure development, such as the construction of new highways, airports, and public transport systems, which can boost property values.

• Government Initiatives: The Indian government’s initiatives like ‘Smart Cities Mission’ are often focused on improving the quality of urban life in Tier 2 cities, which can attract investment and development.

• Urbanization and Migration: As Tier 1 cities become more congested and expensive, there’s a trend of people migrating to lesser crowded cities. This migration can drive demand for housing and commercial space in Tier 2 cities, leading to investment opportunities.

• Quality of Life: These cities often provide a better quality of life than bigger metros due to less congestion, lower pollution levels, and relatively lower cost of living, which makes them attractive to a growing middle class.

• Diversification: Real estate investors might be looking to diversify their investment portfolios by investing in different markets and asset classes, and Tier 2 cities offer a way to do that within the real estate sector.

Conclusion:

Due to a multitude of factors including high property prices, limited availability of land, and intense competition in the real estate market, many investors are now turning their focus towards Tier 2 cities for prospective investment opportunities that offer the potential for greater returns on investment. These cities are generally considered to have a lower cost of living and doing business when compared to Tier 1 cities, making them attractive to investors who are looking for more affordable options with less competition. With the growing trend of urbanization and increasing demand for housing projects, commercial real estate, and infrastructure, Tier 2 cities like Indore are becoming more and more appealing to real estate investors who see the potential for future growth and development.