I n the last few decades, developers and investors have concentrated on India’s metro cities and channelled a majority of investments and project launches to cities such as new Delhi, Mumbai, Chennai, Bengaluru, among others.
Eventually, as is the case with any single-point focussed investment, these regions started facing issues of overpopulation, over-supply of housing and related issues of urban chaos. The Smart Cities Mission, launched in 2015, aims to tackle these escalating problems: from transportation and energy supply to governance and basic urban infrastructure services. We take a look at how, in the last couple of years, the focus is shifting towards our tier-II and tier-III cities:
Top cities
As per recent data from Anarock Research, it is estimated that by 2030, the country will have 104 tier-II, 331 tier-III and IV, and only 155 tier-I cities. Top hotspots include:
North: Chandigarh, Amritsar, Srinagar, Jaipur, Agra, Varanasi
South: Visakhapatnam, Mysore, Kochi, Thrissur, Coimbatore, Tirupur
East: Guwahati, Patna. Jamshedpur, Ranchi, Bhubaneshwar
West: Surat, Rajkot, Nagpur, Nashik, Aurangabad
According to NHB Residex, Ranchi (21.8%), Surat (11.2%), Vizag (9%), Chakan (8.8%), and Ahmedabad (8.1%) had the highest House Price Index percentage increase over the last year.
But what are the factors contributing to this activity? Aashish Agarwal, Senior Director, Valuation & Advisory Services at Colliers International India says it is a combination of lower land cost, economic growth, investment climate, higher disposal income and infrastructure development. “While SMEs and start-ups are driving demand for commercial assets, growing urbanisation and under-penetrated consumer markets are driving demand for retail space. The number of million-plus cities has increased from 35 in 2001 to 53 in 2011, while it is estimated that nearly 41% of online shoppers in 2017 were from tier-II cities,” he says.
Residential vs. office
While the top eight cities (Delhi, NCR, Kolkata, Mumbai, Pune, Hyderabad, Bengaluru and Chennai) are witnessing tremendous growth; central level policies such as RERA, GST, PMAY, etc., ensure that a project’s location would be determined irrespective of the State.
As a result, non-metros are coming into focus, says A Shankar, COO, JLL India. Private equity investments account for 16% of India’s total investment and tier-II cities have accounted for 83% of total investment inflows since 2014. Interestingly, equity inflows worth ₹20,000 crore have been deployed in these cities, largely for well-performing commercial assets.
And as for which sector fares better, he explains how housing demand is on the rise due to growing urbanisation and migration in non-metros. “Lack of land and finance at reasonable rates for constructing affordable housing projects in tier-I cities has pushed these projects to these cities.”
But the commercial sector isn’t far behind. The development of many IT parks, retail developments, warehousing facilities, etc., have been the result of e-commerce/e-retail penetration. “Retail investors are increasingly focusing on emerging retail destinations in tier II-III cities over metros due to better growth prospects.
These cities have witnessed a much higher investment (USD 6,192 mn) compared to metro cities (USD 1,296 mn) from 2006-2017,” says Shankar.
Buyer trends
T Chitty Babu, Chairman and CEO, Akshaya explains how in cities like Coimbatore, the presence of a significant talent pool is driving residential demand, whereas in cities like Ahmedabad, Kochi, Jaipur and Indore, there has been a rise in the growth of favourable business ecosystems, IT and manufacturing sector jobs and improved social infrastructure: all factors that have increased housing requirement. There has also been a heavy demand from >₹30 lakh segment due to the government’s push for affordable housing and there has been a steady absorption in the ₹40-65 lakh segment.
Experts also point out how the lack of alternate investment opportunities is also driving interest in non-metros and online realty platforms / aggregators have been witnessing a surge in interest, although actual growth in sales is still sluggish.
Ankit Kansal, Founder and MD, 360 Realtors, focuses on growth seen in the cities of Lucknow, Patna, Kanpur, and Ahmedabad. While 2 and 3BHK’s are popular across these regions, investment from surrounding micro-cities is an additional factor contributing to their realty development. “For instance, Patna’s status as a capital city attracts a lot of investments from nearby places such as Arrah, Chapra and Nalanda and the city is also expanding in the form of upcoming areas such as Bihta and Danapur,” says Kansal.
Smart cities
One of the most important drivers of new real estate demand for many of these smaller cities has been their inclusion in the ambitious Smart Cities Program, which — at least in theory — bodes very well for their markets.
Santhosh Kumar, Vice Chairman, Anarock Property Consultants explains how, while many of the bigger cities have also managed to enlist themselves under the scheme, it is, in fact, the smaller city contenders who have managed to show any visible progress. “It can safely be said that the Program has not unfolded as was initially expected. As of now, only 2% of the ₹9,943 crore released have been utilised, and only 5% of the proposed projects are completed. This does raise questions about whether the development of smart cities by 2020 is a realistic expectation,” says Kumar.
Having said that, one needs to look into the various bottlenecks preventing the speedy implementation of these projects: land acquisition, buy-in from resistant stakeholders, to name a few. But with more active citizen participation, the development of these smart cities could theoretically be faster, he says.
NRI investments
Another factor that has significantly contributed to the rise of our smaller towns has been the inflow of NRI investments into the sector (ranging between 10-20% annually). It is no doubt the volume of NRI investment is huge in tier-I cities, but many are now putting in money in their respective home towns. “Their investments in residential projects are between 30% and 40%, especially in premium segment in many tier-I and tier-II cities. However, the growth in the affordable sector has increased the investment share to 20%-30% in metro cities,” says Shankar.
Given the higher yield rate of commercial properties, many NRIs are also looking at investing in them. Factors such as the introduction of Real Estate Investment Trust (REIT), increase in private equity and foreign investment are encouraging them further.
Road ahead
No doubt, the future of our tier-II and tier-III cities is bright, provided developers and local bodies learn their lessons from what has worked in existing top cities. The recently released Ease Of Living Index by the government (across 111 cities) has indicated the areas of weakness, as well as opportunities, for non-metro cities to invest in planning, infrastructure and governance, which could give them the opportunity to position themselves as challengers to metro locations for attracting businesses, tourists and residents. Co-working operators are already present in a number of tier-II cities – with aggressive expansion plans – which could be a paradigm shift for doing business in these locations, says Agarwal.
And also, they have fewer challenges to overcome on the road to becoming smart cities and a lot more to gain from the generous funds that have been deployed, concludes Kumar.
