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 home towns 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.