What are tier-1, tier-2, and tier-3 cities?
Indian cities are classified as X (tier-1), Y (tier-2), and Z (tier-3) categories by the government, based on the population density. There are eight metropolitan tier-1 cities – Delhi, Mumbai, Bangalore, Chennai, Hyderabad, Kolkata, Ahmedabad, and Pune. On the other hand, 104 cities are categorized as tier-2, while the remaining cities fall under the tier-3 category.
Tier-1 cities are densely populated and have higher living expenses. There are major international airports, industries, top multi-specialty hospitals, education, and research institutes in these cities. Urban planners and economists believe that certain cities, officially classified as tier-2, are as good as any tier-1 city. The economic activities and lifestyle in the cities like Gurgaon, Noida, Vellore, Coimbatore, Kochi, Thiruvananthapuram, Patna, Rajkot, Goa, Lucknow, and Jaipur could elevate these cities to the next level in the coming years.
Advantages and disadvantages of tier-2 cities
|Advantages of tier-2 cities||Disadvantages of tier-2 cities|
|Decent infrastructure and connectivity||Poor international air connectivity|
|Low pollution levels||Lesser economic activity|
|Fewer traffic bottlenecks||Absence of MNCs|
|Moderate cost of living||Fewer job opportunities|
|Better quality of life|
|Low real estate prices|
|Low cost of doing business|
How COVID-19 has changed buyers’ preferences?
Aditya Kushwaha, CEO and director, Axis Ecorp, points out that the COVID-19 pandemic has altered how we live, work, learn and play. The overall health, hygiene, and wellness concerns during COVID-19 have significantly shifted the focus towards spacious homes, set amid verdant greenery, away from densely packed cities. Further, riding on the wave of sustainability and prospective investment, the holiday homes/secondary housing segment has emerged as a sought-after option for buyers, whose jobs and lifestyles have remained unaffected in the wake of pay cuts. People’s preferences have shifted from the top metro cities to tier-2 and other tourist destinations, he says. “Investors believe that they can find better entry prices, flexibility, and sizable returns in such locations,” he explains, attributing the shift to the concept of remote working.
Real estate trends in tier-2 and 3 cities
- The emergence of organized real estate markets in smaller cities.
- Lower demand-supply imbalance.
- Greater demand for quality housing with work from home.
- Lesser migrant labor issues.
- Lesser construction curbs due to COVID-19.
- Higher profit margins for developers, owing to lower land values.
- Property prices rising but yet far lesser than the top 10 cities.
What is the future of real estate in 2021 in tier-2 cities?
Hiral Sheth, HOD, marketing, Sheth Creators, also believes that the internet has been the backbone of 2020, with most people working from home. With a lot of people shifting back to their hometowns during lockdown and people realizing the importance of having a home of their own, there has been a spike in home buying in tier-2 cities. With this trend attracting reputed developers, the quality of housing would also improve in these cities. “While realty costs in tier-2 cities will be lesser than tier-1 cities, people will also have benefits like large open spaces, that ability to stay close to family, low pollution, etc. Most tier-2 cities today have good infrastructure advancements like metro stations, excellent public transport, and availability of basic facilities like schools, hospitals, banks, and shopping markets,” says Sheth.
Deepak Goradia, vice-chairman and MD, Dosti Realty, points out that with offices planning to adopt work-from-home on a long-term basis, many prospective home buyers are considering shifting base to the peripheral areas and investing in homes at more affordable prices. “The buyer’s preference for a change in location is fuelling property demand in the peripheral locations of cities today,” he says.
Following the Coronavirus pandemic, many businesses may also shift to tier-2 cities. Hence, it is believed that by the second half of 2021, demand would increase in tier-2 cities, owing to better employment opportunities, infrastructure growth, and improving connectivity. Nevertheless, several roadblocks remain. For example, FDI for projects in these cities has been a major challenge. However, this can be made easier by the government through policies and tax initiatives, and benefits that could entice people to invest and set up living and working bases in these high-potential tier-2 cities.
Impact of COVID-19 second wave on real estate in smaller towns
Although several forecasts at the beginning of 2021, suggested that the year would witness greater real estate activity in tier-2 and tier-3 cities, many maintained that the Coronavirus crisis was a temporary phase and that the market would be back to normal, once the pandemic settled down.
However, the second wave of COVID-19 has forced both, real estate developers and home buyers, to evaluate the cost and benefit of moving to peripheral locations and smaller towns, yet again. Now, real estate stakeholders are looking at the business possibilities and open spaces in the smaller towns, from a long-term perspective.
Moreover, projects in smaller towns, make it easier for developers to incorporate concepts of wellness, as the land cost is relatively cheaper in these places. This makes it feasible to build large projects with more open spaces and amenities.
From the home buyers’ standpoint, tier-2 and titer-3 home towns are more affordable to live in and feasible to work. After all, many industries are investing heavily in IT infrastructure, making work from home a reality for their workforce. Consequently, after adopting the new normal, these companies are unlikely to reverse the trend, as it also allows them to reduce costs incurred on office spaces in the process.
Factors that favor the growth of real estate in tier-2 and tier-3 cities
While the COVID-19 pandemic has changed the market dynamics and the norm of work from home has brought tier-2 and tier-3 cities into the reckoning of real estate opportunities, critics have their own concerns. Some of these include:
- Will the shifting of the talent pool to tier-2 and tier-3 cities be a long-term phenomenon?
- Would corporates shift their base to smaller cities?
- Can tier-2 cities attract a cosmopolitan talent pool beyond the hometown prodigies?
- Will connectivity and transportation be an issue with these smaller cities?
As the world learns to live with the new normal post-COVID, many of these pressing issues are being seen as opportunities. For example:
- The cost of doing business per sq ft is much lower in tier-2 and 3 cities.
- Tier-2 and tier-3 cities are emerging as hubs for logistics and warehousing.
- Quality housing at affordable rates is available for the workforce.
- A number of upcoming industrial corridors are running through many of these smaller cities and this will provide seamless connectivity.
- The government plans to open 100 additional airports and 1,000 new routes, connecting smaller towns.
It may seem premature to make a conclusive statement as of now but the fact remains that the potential of tier-2 and tier-3 cities, is yet to be tapped. The Coronavirus pandemic has turned adversity into an opportunity for smaller cities.