The real estate landscape in India is going through a complete transformation, and investors are beginning to focus their attention on second-tier cities rather than going with the norm of metropolitan cities. These second-tier cities, such as Pune, Chandigarh, Indore, Bhubaneswar, and Coimbatore, are showing returns that frequently surpass tier-one cities because of the renewed infrastructure, favorable demographics, and entry costs that are arguably significantly lower. What we have is a compelling investment opportunity built on government initiatives, corporate expansion, and improving connectivity with capital appreciation and rental yield all attracting smarter investor’s cash flow.
“As per Anurag Goel, Director of Goel Ganga Developments, “Second-tier cities are going through an unprecedented phase of growth by being positioned perfectly between affordability and quality of life. We are seeing uninterrupted demand from end-users and investors alike, who are able to see the long-term value proposition in these markets.” This viewpoint demonstrates the evolving sentiments of confidence in tier-two markets where property prices remain affordable while living, economic and employment prospects continue to increase with the improvement of infrastructure. Tier-2 cities are developing into IT parks, educational institutions, Stronger health care and now there are some eventual sustainable demand drivers that provide stability in property prices.”
Investing in second-tier cities’ rental markets can present some of the best opportunities in the country, typically having yields in the range of 4-6 percent yearly, in comparison to 2-3 percent in larger metro areas. With a growing population of professionals and comparatively lower costs to acquire property, Keshav Mangla, GM Business Development of Forteasia Realty, states “The rental yields in second-tier cities are highly attractive for purpose-built rental projects because of the number of young professionals and families moving there for lifestyle and career ambitions.” After the pandemic, we have seen a demographic shift, with remote work and corporate decentralization becoming more commonplace, creating a larger underlying serviceable tenant population, producing stable consistent rental income.
Infrastructure development continues to be a key enabler of real estate development throughout these developing markets. Aman Gupta, Director of RPS Group states, “Government projects to invest in transportation infrastructures such as metro stations, airports and major highways have enhanced the accessibility and attraction of second-tier cities. Properties located along or near these infrastructure corridors are showing exceptional growth in appreciation.” The Smart Cities Mission and several state-level initiatives to advance urban renewal and development has fast-tracked the creation of modern amenities and governance systems similar to those of larger cities.
Increasing growth in manufacturing and service sectors has further solidified the economic base of second-tier cities. LC Mittal, Director of Motia Builders Group states, “The industrial growth and the movement of corporations to second-tier cities, are leading to jobs that are creating housing needs. We are seeing continued interest from both residential and commercial.” By diversifying to a broader economy, dependence on single industries is reduced and demand drivers for real estate investment increase.
From a portfolio perspective, second-tier markets provide diversification benefits for real estate investors. Siddharth Maurya, Founder & Managing Director of Vibhavangal Anukulakara, states, “Including properties from second-tier cities in your real estate portfolio can give you better risk-adjusted returns and hedge against market volatility prevalent in the major metros. Second-tier cities develop relative to each other and typically have their own unique economic movements independent from many tier-one cities – therefore, they provide natural diversification.” While their relative distance to metropolitan markets and strong fundamentals are attractive for long term wealth creation, the evolution of affordability/infrastructure, and economic and demographic growth provide attractive fundamentals for investing in second-tier cities.
The combination of affordability, infrastructure/investment needs, economic growth, and demographics combine to position second-tier cities to offer the best investment opportunity going forward in India’s real estate investment landscape, giving investors the ability to focus on the urbanization story within India’s overall economy while also attaining higher returns that may be more difficult from more developed metros.
