There has always been a big debate as to whether Tier I or Tier II cities hold the key to the next phase of growth opportunities in the Indian real estate sector. There is a myriad of opinions – supporting and negating the real estate boom theory in Tier II cities. Since the outbreak of Covid-19 pandemic and reverse migration of talent pool to their hometowns, the noise around Tier II cities has been louder than before. However, there are various factors to consider before arriving at any conclusion in this regard. These factors play a crucial role in determining the fate of the real estate landscape in any city.
– The scale of real estate development in any city is determined by the size of its population. As urban areas started getting crowded due to inter city migration, some Indian cities, due to their political, financial or technological dominance emerged on the forefront of real estate landscape sooner than the others. Delhi, Mumbai, Bengaluru, Kolkata, Chennai, Ahmedabad, Pune and Hyderabad, all fall under the population-based classification of Tier I cities as they have a population of more than 100,000. Also, as per the House Rent Allowance (HRA) city ranking scheme, these eight cities are classified as “metros” due to their metropolitan culture. Due to a smaller population base, as well as inter city migration to “metros” for higher education and job opportunities, the real estate scene in Tier II cities continues to play catch up with the metros. Low population density compared to metros has been a big impediment to large scale real estate development. This itself creates a bottleneck for the real estate sector to emerge as an organized play in these cities, even though real estate may continue to develop organically.
– The eight metro cities are crucial to the local state economy and account for a massive contribution to the Gross State Domestic Product (GSDP). Whether it is Mumbai Metropolitan Region (MMR), National Capital Region (NCR) or Bengaluru Metropolitan Region (BMR), these urban agglomerations are the engines of economic growth at both state and national level. MMR alone contributes 19-20% of Maharashtra’s GDP and 6% to India’s GDP. Similarly, NCR, which includes prominent cities of Delhi, Gurugram, Noida, Faridabad and Ghaziabad is an economic powerhouse with a huge base of diversified businesses in financial, commercial, industrial and manufacturing sectors. Delhi alone contributes ~4% to India’s GDP. Due to the accelerated economic activity within NCR, nine counter-magnet towns were identified which will get priority in fund allocation for infrastructure development. These nine counter-magnet towns fall in the Tier II and Tier III categories and are spread across 6 Indian states.
A similar local economy scenario exists for other Indian metros too. Bengaluru is India’s leading exporter of information technology and business process outsourcing services. Bengaluru’s economy contributes 43% to Karnataka’s economy and 98% to the state’s software exports. The dominance of large industrial and services sector footprint in Indian metros cannot be replicated in Tier II cities as huge investments in talent pool and infrastructure creation has been done in these cities over decades which will always put them at the top of the pecking order.
– Population, demand of urbanization, local economy and strong growth of secondary and tertiary sectors ensured that real estate development does not fail behind in metros. This led to well-developed suburban and peripheral boundaries around metros. As new micro-markets emerged on the scene, creation of residential, office and retail real estate stock only catapulted as there was a need for shops, offices, commercial complexes, houses, apartments and factories like never before. It was only a matter of time before a handful of powerful real estate developers emerged in the Indian metros, with a well contoured and noteworthy real estate infrastructure. It is this group of large real estate developers, which are India’s leading listed real estate entities today with a Pan India presence and huge market share. These handful of players continue to expand their footprint in Tier II cities and experiment with formats of real estate developments which are new concepts in these markets. Their partnerships with local real estate developers are what is driving credibility and fancy real estate developments in Tier II cities.
– Indian metros have a well-developed network of air, road and rail transport. Metro Rail network is either operational or under construction in all of them. Further, efforts to augment existing metro lines to last mile connectivity as well as other infrastructure upgrades always get priority in state budgets due to their huge population base. Of the Tier II cities, Nagpur and Kochi have an operational metro rail network whereas Agra, Kanpur, Bhopal and Indore have one under construction. Flying is no longer restricted to metros, but as per Airports Authority of India’s (AAI) October 2021 estimates, a bulk of domestic and international air traffic still comes from New Delhi, Mumbai, Bengaluru, Kolkata and Hyderabad. The number of domestic air passengers in New Delhi and Mumbai in any given month exceed the entire population base of some of the Tier II Indian cities.
Similarly, the quality of physical infrastructure – whether it is in terms of highway connectivity, broad roads within the city, freeways or social infrastructure – in terms of number and quality of medical institutes with access to specialty treatment and doctors, universities and technical education institutes or hospitality, retail and entertainment options, metros are far ahead of the curve.
Due to the above factors, the current stock of office parks, residential inventory, warehouses, and shopping malls in any Indian metro far exceeds that of any Tier II city. Indian metros feature regularly in sustainable development initiatives and indices due to the asset quality focus on green and well standard buildings. The real estate portfolios of leading Grade A developers in metros are a cynosure of institutional investors and are a driver of private equity investments in Indian real estate. In fact, organized real estate development in metros acts as the cornerstone on which the real estate fortune of smaller cities invariably depends on.