Many factors can make real estate in tier-II, III cities attractive to institutional investors
India has over 40 tier II and tier III cities with million-plus populations, and some of these are growing as fast as their tier I counterparts. Several have been selected under the Central Government’s Smart Cities mission, and will therefore attract investments ranging from INR 1,000cr to 1,500cr in the next five years. Other missions like AMRUT, Swachh Bharat Mission, etc. will also help these cities considerably.
Thanks to such schemes, these non-metros will improve rapidly on their infrastructure and the quality of life they offer. Job creation will, of course, be a primary driver for the future real estate demand in these cities. Simultaneously, the inter-city air connectivity in many of them is set to improve, thanks to a new aviation policy. With high-speed trains to be introduced and rail corridors planned, travel time to tier I cities will reduce considerably and rail connectivity to other tier-II, III cities will also improve. The to-and-fro movement of people and businesses will increase.
The residential asset class will see maximum growth thanks to these developments. In some cities, the next few years are likely to bring high-speed rail connectivity; as a result, residents of these cities will be just about 45-60 minutes away from tier I cities. For example, living in Chandigarh and working in Delhi will become an entirely viable proposition. Currently, it takes around four hours to travel between these two cities.
Also, better education and healthcare facilities are coming up in many of these cities even now. With the social infrastructure improving, the future will bring a significantly improved environment for businesses, as well.
Apart from state capitals and the future Smart Cities, non-metros with access to IT talent and a good presence of IT/ ITeS occupiers – for example Coimbatore and Kochi – will develop rapidly. That said, there will be divergent rates of growth within this group of non-metros, so they will not all deliver uniformly. Much depends on the performance of local governance bodies, and whether they will be able to display the same efficiency as the states and Centre when it comes to implementing government programmes. Currently, cities such as Nagpur, Surat, Jaipur and Indore are seeing very proactive measures being taken by their local governance bodies. This kind of performance will be one of the main yardsticks with which to measure future growth – and therefore investment potential.
The Rationale For Institutional Investors
These cities always need to have quality players, especially to build world-class infrastructure. This is an opportune time for institutional investors to identify the right products being developed by credible developers, meaning those who follow corporate governance practices and financial discipline.
At the same time, it would not be appropriate to say that non-metros are an alternative to tier I cities when it comes to real estate investments. Both types of cities have very different dynamics – for example, the trade volumes are much larger and growth prospects much higher in tier I cities. Over the past two years, only well thought-out projects by good developers have displayed good sales volumes in tier I and tier II cities. However, non-metros have lower entry levels, and as the micro-locations within these markets upgrade and provide more employment opportunities, demand for real estate will reach higher scales.
All these urban areas continue to see a shortage of affordable housing – a segment that provides a clear opportunity for the markets to grow by matching end-users’ requirements. Though investors should not expect appreciable returns in a short term of 2-3 years, none of the non-metros will prove to be a bad bet for long-term investors.