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Investing in tier 2 and tier 3 cities

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New airports and highways, besides availability of skilled labour and affordable co-working spaces, are shifting the focus of builders and buyers to smaller destinations

New airports and highways, besides availability of skilled labour and affordable co-working spaces, are shifting the focus of builders and buyers to smaller destinations

The real estate market in tier 2 and tier 3 cities is experiencing exponential urbanisation as investors learn about the advantages of doing business in these areas. And this, in the wake of the Government of India announcing the launch of a ‘Digital India Startup Hub’ programme as well as a ‘Digital India Investment Fund’ to fund startups. The Ministry of Commerce and Industry had said recently that nearly 50% of the recognised startups in India were now from tier 2 and 3 cities. These startups had created more than seven lakh jobs.

Making a huge leap post-pandemic, these cities that already had a number of benefits to show, such as lower pricing, a greater variety of options, and improved infrastructure, are now promoting their proximity to urban regions, making them an attractive option for commuters.

As a result, the demand for real estate in these cities has increased, leading to higher prices and more construction. It is crucial to realise, however, that not all tier 2 and tier 3 cities are made equal. While some of these cities have been able to attract large developers and provide a wide range of amenities, others are still struggling to meet their residents’ requirements. Therefore, it is worth researching before investing in real estate in a particular city.

In the past decade, the real estate business has seen several changes. Increasing investments in tier 2 and tier 3 cities are one of the most significant trends. Investors are more interested in these cities due to their growth potential.

Attractive alternative

The emergence of co-working spaces represents the second shift. These spaces give organisations a flexible and cost-effective alternative, resulting in an increase in demand from firms of all sizes. There is also a growing emphasis on sustainability in the real estate sector. To attract environmentally concerned buyers and tenants, developers are now employing sustainable features into their projects. As a result of these shifts, the real estate market is adapting to meet the changing requirements of both investors and residents.

The Indian government has taken several measures to foster economic growth and development throughout the country’s real estate sector. The construction of new airports, highways, and industrial or commercial properties in tier 2 and tier 3 cities is one such endeavour. These airports are intended to increase tourism and commerce, as well as connectivity between various regions of the country.

In line with their focus on infrastructure development, the government has allotted a development fund of ₹20,000 crore for the construction of 25,000 kilometres of motorways in the fiscal year 2022-23, which will be beneficial for real estate development in tier 2 cities.

It is also possible for new areas of development to be created by establishing a multimodal logistics park or a special economic zone for industrial development. Moreover, the cost of materials and labour is lower in these cities, making them an attractive option for business owners. The government has implemented programmes such as RERA, which has now completed five successful years, to safeguard the interests of residential buyers.

It is no secret that tier 1 cities in India have been the driving force behind the country’s economic growth. But now, tier 2 and tier 3 cities are catching up with the trend presenting an exciting opportunity for developers and investors who are looking to tap into new markets.

Full swing

Startup activities are picking up in these cities. Affordable land and labour expenses are an important reason for startups to stretch their budgets further and achieve profits much faster. Also, these locations typically have a more simplified regulatory environment, which decreases the time and cost required to establish a new business. Many tier 2 and 3 cities are positioned close to significant marketplaces, enabling startups to reach their target consumers. The economic growth of these cities in turn impacts the real estate industry there.

The writer is Managing Director, Rhythm ResiTel.