Will Tier 2 Cities Lead Indian Realty Growth in 2017?

This is a pertinent question that often forms the subject of debate today. And, rightly so. With the real estate market in metros facing a sluggish trend over the last two years, it becomes imperative that the key stakeholders look beyond them. More so, with several infra projects in the pipeline, heightened economic activity and increasing interest of IT/ITeS and BPO sectors, the realty market in tier 2 cities seems to be on a new high.

Adding a feather to its glory, the central government has also rolled out several initiatives benefiting the realty prospects in many tier 2 cities. From the final selection of towns under the 100 Smart Cities and AMRUT schemes to various infrastructure upgrades including metro rail and road-widening projects, the Centre is all out to assist smaller towns and cities lying in the hinterlands of the country and transform and develop them as new models of urbanization.

First, let us understand the factors that are driving growth in tier 2 cities.

  • Land prices are cheaper than their metro counterparts and, thus, property is priced more competitively.
  • Realizing their potential, many businesses including IT and BPO companies are setting their base and expanding operations in these cities. Many IT-friendly policies are also expected to come up in the future, thereby, attracting multinationals to expand their base here. And, creation of ample job opportunities will drive residential growth in return.
  • Government initiatives like Smart Cities mission, AMRUT Cities, ‘Digital India’, ‘Skill India’, ‘Housing for All by 2022’ are also expected to bring about a change in these cities.
  • Out of the total 98 cities selected for Smart Cities project, a large chunk were the tier II cities.
  • Seeing future potential, multiple leading developers like Tata Housing, Prestige, Sobha, Godrej, among others have already set their foot in these smaller cities.

Metros vs Tier 2 Cities

So, how do these smaller cities fare in comparison to their metro counterparts?

Well, it is true that smaller cities have also been driving real estate growth in recent times and looking at the current trends they will continue to do so in 2017 as well. But, the real question of whether these tier 2 cities will take the lead in the coming year and supersede their metro counterparts is not entirely true.
This is mainly because commercial activity in major metros picked up substantially in 2016. As per Colliers International report, office space absorption across top nine cities saw sustained growth with total pick-up of 28.3 million sq. ft. office space during the first nine months of 2016. And, this trend will only grow in the future with RERA in place, relaxation in FDI norms and the recent demonetization drive, among other initiatives. The sector is poised to become more transparent and organised and this, in turn, will drive realty growth in metros as well.

As for the tier 2 cities, they will very much become an important part of the overall growth in the real estate. And, the smart city tag given to many of these will only heighten activity. Also, while 2016 was the year of major announcements, the coming year 2017 will be the time for execution of most of these government initiatives. Hence, it will be interesting to see how it shapes the future of real estate growth in tier 2 cities.

Thus, to say that tier II cities will steal the ‘real’ show from major cities is not entirely true. Nevertheless, the pace at which metros are seeing growth is relatively slower than its tier II counterparts. The major reason for this is the fact that development in metropolitan cities has reached saturation and prices have skyrocketed in major markets such as Delhi-NCR and MMR. But, going forward, the Indian real estate will only be more mature with speculation giving way to realistic pricing.

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