Why to Investment in II and III Tier cities in India?

By Student Submission for Accommodation Times Institute of Real Estate Management 


After incentives allocated by Finance Minister in the current Union Budget 2017-18 for affordable housing, only II and III tier cities will get benefited. All projects in these small cities will be qualify for exemptions. The end user will benefit from such sops offered in the Budget.

There are various avenues for investing money, real estate being one of the few offering higher returns.

As Indian economy experiences the boom in all sectors triggered by its economic and investment policies, huge investments are flowing into the metros or the Tier I cities in industrial and services sector. Such large-scale investments have boomed the realty sector creating congestion due to increasing demand for residential and commercial properties. This congestion in realty structures has forced the respective governments and many investment companies to seek out for alternative smaller cities leading to a demand for Tier II and III cities.


Drivers/Factors for growth:

One of the basic reasons for investments flocking in to the smaller cities is available properties and affordable prices. Moreover, the special initiatives taken by the respective governments in providing the smaller cities with infrastructural facilities and creation of SEZs, has played a vital role in promoting these small towns into cities of the future. Keeping in view all the congenial factors necessary for setting up corporate infrastructure, the investing companies ranging from pharmaceuticals to financial institutions, automobiles to the IT & ITES sectors; to the retail and real estate sector are opting for the smaller cities transforming them into India’s fastest growing cities in a matter of few years.


The large scale investments by the corporate sector in the smaller cities apart from initializing economic prosperity and job opportunities has also created demand for realty spaces. While developers from all the nearby areas flock in to cater to the real estate demands, the property markets in these smaller cities are witnessing along with a changing skyline, an unprecedented hike in real estate prices. While the realty trend in Tier I cities have reached a saturation point, with the yield gap witnessing significant margin of 9.5 to 10 per cent, the Tier II cities record a yield of 10.5 to 11.5 per cent. However, the emerging winners in the present real estate scenario of India are the Tier III cities, which offer greater yields of up to 12 percent. This rising prices and promising future of these cities are driving investors to buy properties predicting long-term gain in years to come.


Recent trend also shows that due to lack of availability of business equipped infrastructure and exorbitant property prices in the existing metros, the IT, ITES and the BPO companies are vying for the smaller cities where they are promised better infrastructure, state-of-the-art office spaces and also skilled manpower. A careful study of these Tier III cities reveals the close proximity of these cities, to the most happening cities of India like Delhi, Mumbai, Bangalore to name a few. Thereby, it will be no mistake if they are called the extension cities of the booming metros. Of late, the tier II cities like Pune, Kolkata and Hyderabad have made business opportunities and infrastructural development like never before. Now it is the turn of the Tier III cities or the smaller cities like Jaipur, Ghaziabad, Kochi, etc. to make it
big into the realty business as the government and the corporate sector target them as ‘India’s Next Destination Cities’.


There is a current urban shortage of more than 12 million homes, in a total of 45 to 50 cities with a population of more than one million people each. This increases by approximately 1.5 million homes every year. The total demand for apartments in Bangalore is estimated at 24,000 units each year, with an expected annual growth rate of 20% over the next several years. The capital value or cost of flats has almost doubled in cities like Gurgaon where prices went up to Rs 45 lakhs from Rs 15 lakhs a couple of years back.


Now, India allows 100% FDI in the construction sector. Land parcel minimum has been reduced to 25 acres, which has opened up more opportunities for international investors and developers. According to an estimate, this legislation will inject more than US$1 billion annually into India’s development and construction industry. Also, India attracts net investment of more than $1.5 billion each year to create 25- to-30 million square feet of new office space needed to meet the increased demand from the IT and technology sectors.


The current news of abolishing Service Tax for Residential Property by Finance Minister has brought a time to rejoice for property buyers.


Few other instances / news which highlight an upsurge in movement of real estate in lesser known Indian cities are as follows:

1      Haryana Urban Development Authority (HUDA) to bring skyscrapers at its proposed city centre site in Sector 29, Gurgaon. HUDA is also going to increase price of its plots in its upcoming Gurgaon colonies than the offer price due to large expenditure on mega infrastructure projects such as Metro Extension in Gurgaon, wider roads and flyovers, expensive cost of land, and increasing development cost. Plots in Sector-57 fetched Rs 3,780 and Rs 4,620 per square yard in 2004 and Rs 6,000 per square yard for the group housing society plots in 2006.

2      Ansal to Raise Rs 1,000 Cr through Follow up Public Offer (FPO). It will use the proceedings for funding its current real estate projects and initiate new projects in hospitality and education sector.

3      Parsvnath to bring idea of ‘Luxe Living’ in Chandigarh where they have recently announced the launch of most exquisitely designed, 123 acre luxurious township in Chandigarh. The project will be done in a collaboration of Chandigarh Housing Board. To be named as Parsvnath Prideasia, the Township will come up amidst Sukhna Lake, golf course, and an upcoming five star hotel. It has saleable residential area of 38.5 lakh square feet and a commercial area of 2.7 lakh square feet.

4      A plan to build an IT SEZ at Nandigram.

5      QVC to develop 100 acres of townships in Gurgaon. QVC Realty, India’s first venture funded Real Estate Company, announces to invest Rs 2,500 crore to develop two exclusive townships in Gurgaon. The company is looking forward to take up more such projects in Southern India. The estimated investment for these two projects will be around Rs 2,500 crore each and made over the next 3-4 years. QVC has already acquired 200 acre land in Gurgaon for the proposed project.

6      Gujarat leads National Chart in terms of area occupied by SEZs. Finally, Gujarat has emerged as the leading SEZ state. Thanks to prohibitive investments in the segment. Around 15,000 hectares of the state land is to be utilized for the development of these duty free enclaves. Gujarat leads the national chart on the back of same fact in terms of geographical area occupied by SEZs. The Board of Approvals has given the nod for the construction of five more such projects in Gujarat. Following in footsteps of Gujarat is Maharashtra. With the total 11,500 hectares reserved for SEZs, the state wins the second position. Andhra Pradesh has 11,000 hectares of area under SEZs which puts it after Maharashtra. Tamil Nadu comes to a fourth position with around 5,000 hectares and Orissa has 2,500 hectares.



Why Invest in Indian Real Estate?

Indian real estate sector is on boom and this is the right time to invest in property in India to reap the highest rewards. Flying high on the wings of booming real estate, property in India has become a dream for every potential investor looking forward to dig profits. All are eyeing Indian property market for a wide variety of reasons:


It’s ever growing economy which is on a continuous rise with 8.1 percent increase witnessed in the last financial year. The boom in economy increases purchasing power of its people and creates demand for real estate sector.

India is going to produce an estimated 2 million new graduates from various Indian universities during this year, creating demand for 100 million square feet of office and industrial space. The presence of a large number of Fortune 500 and other reputed companies will attract more companies to initiate their operational bases in India thus creating more demand for corporate space.


Real estate investments in India yield huge dividends. 70 percent of foreign investors in India are making profits and another 12 percent are breaking even.

Apart from IT, ITES and Business Process Outsourcing (BPO) India has shown its expertise in sectors like auto-components, chemicals, apparels, pharmaceuticals and jewellery where it can match the best in the world. These positive attributes of India is definitely going to attract more foreign investors in the near future.

The relaxed FDI rules implemented by India last year has invited more foreign investors and real estate in India is seemingly the most lucrative ground at present. The revised investor friendly policies allowed foreigners to own property, and dropped the minimum size for housing estates built with foreign capital to 25 acres (10 hectares) from 100 acres


(40 hectares). With this sudden change in investment policies, the overseas firms can now put up commercial buildings as long as the projects surpass 50,000 square meters (538,200 square feet) of floor space.



Future Trends:

Based on the following data, let us see what will be the future trends of real estate in Indian cities.


(i) Scope exists for 400 Township projects over the next 5 years spread across 30-35 cities, each having a population of 0.5 Million.

(ii) Total project value dedicated to Low/Middle income housing in the next 7 years estimated at $40 Billion.

(iii) India will attract more than US$40 billion within a decade to create sufficient urban housing by 2015.


(i) The driver of the growth has been steady demand in already established markets, boosted by success of off-shoring phenomenon and the new economy representing

IT & BPO sectors, like National Capital Region, Mumbai, and Bangalore and continued emergence of newer markets like Hyderabad, Chennai, Pune, Kolkata and Chandigarh. There is also a renewed interest in other untapped locations as well, mainly in tier III cities such as Jaipur, Coimbatore, Ahmedabad, Lucknow etc.

(ii) IT Parks constitute a growing segment of the overall office property market with potential absorption of close to 43 million square feet over 2005-08.

Retail / Hospitality / Entertainment:

(i)   Organized retail while growing at 20-25% per annum, will still not likely account for more than 8-9% of the total retail industry in terms of value by year 2010.

(ii)  Estimate of 46 million sq. ft. of space for malls and multiplexes is being added in Tier I, II and III cities in the next 24 months.


Given below are the upcoming (II and III) cities in India. The real estate investments in these cities will yield a handsome return over the next 5-8 years, if not in shorter duration.

Agra, Amritsar, Bhiwadi, Bhopal, Bhubaneshwar, Coimbatore, Greater Noida, Greater Bangalore, Goa, Ghaziabad, Indore, Jaipur, Jalandhar, Jamshedpur, Jammu, Kochi, Kanpur, Ludhiana, Mangalore, Mysore, Manesar, Mohali, Nagpur, Nashik, Neemrana, Panipat, Rudrapur, Sonepat, Srinagar, Thiruvananthapuram, Visakhapatnam, Zirakpur.










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