Tier-2 and Tier-3 Cities: The New Frontier for Affordable Housing in India
The transformation in the urban environment of India is a silent but a great change. Tier-1 cities such as Mumbai, Delhi, Bengaluru and Chennai have taken on a leading role in the real estate story in the decades. They have been perceived as the centers of development, hope and possibilities. The inexorable trend of urbanization, soaring property costs and the infringement of infrastructure have however slowly turned the attention of home buyers as well as developers to Tier-2 and Tier-3 cities. The new frontier of affordable housing in India is what was initially being determined as a peripheral market.
The concept of affordable housing has undergone a lot of development in the last ten years. The industry has been given an impressive impetus with the introduction of the Pradhan Mantri Awas Yojana (PMAY), the Housing for All mission, and other state-based incentives. However, affordability in Tier-1 cities is a significant issue regardless of the support of policies. Tier-2 and Tier-3 cities, in turn, offer a combination of factors that is uniquely advantageous: the decreased cost of land, the increasing infrastructure, the increasing number of employment opportunities, and the increasing number of aspirational middle classes.
The smaller cities are not just characterized by their size; they are the new trend of urban growth. Indore, Lucknow, Surat, Coimbatore, Nagpur, Jaipur Vishakhapatnam and many other cities are turning out to be hot real estate markets. Similarly smaller Tier-3 cities like Kochi, Nashik, Guntur and Mysuru are also experiencing growing residential demand by local population as well as by metro-returning migrants.
This transition was further boosted by the COVID-19 pandemic. Telecommuting, online connectivity and shifting lifestyle desires have enabled families to leave overcrowded metros to live in cheaper, habitable, and sustainable cities. Developers who were reluctant to venture into smaller markets in the past are now looking at them as start-up point to long-term investment and growth.
With India making an ambitious target of providing housing to everyone, Tier-2 and Tier-3 cities will be a defining part. Not only are they bridging the affordability gap but they are also establishing a new standard of quality urban living.
The Emergence of Metro and Megacities in Indian Urban Lands.
The Indian urbanization is no longer about the megacities of India. In the last 20 years, Tier-2 and Tier-3 cities have become the engines of economic growth in the country. This change is preconditioned by a variety of factors that are interdependent — demographic development, the regional policy of investments, better connectivity, and the digital revolution. These smaller cities are proving to be a possibility of living, working, and investing as industries are no longer metro-driven.
The past trend in urbanization in India was strongly disproportionate to the large metros because of the instrumentalization of the industry and infrastructure. Nevertheless, the high rate of population growth was soon followed by an overcrowding, traffic jam, environmental strain and high-housing costs. At the same time, transport, telecommunications, and logistic advances have enabled firms to work effectively in small cities. This change was further spurred by the Smart Cities Mission, which was initiated by the Indian government in 2015 and that facilitated sustainable urban planning and digital governance in mid-sized cities.
The other key driver to this increase is the growth of middle class. As the disposable income and aspiration lifestyles of more people in small towns increase, they are now demanding improved housing, facilities and connectivity. Reports by industries have indicated that in Tier-2 cities like Lucknow, Coimbatore and Chandigarh the residential demand has increased by more than 20 percent over the last couple of years. The growth is not limited to the local residents since a huge chunk is now demand by the migrants who back to metros and NRIs seeking value-based investments in their native places.
Moreover, the distance within small cities and the large economic centers has decreased due to better transport infrastructure, including expressways, regional airports, and metro projects. As an example, the Delhi-Meerut Expressway and Mumbai- Nagpur Samruddhi Mahamarg have integrated the Tier-2 in the national economic system, offering real estate potential on the route.
The cultural and environmental edge that such cities have is what makes this transition interesting. Tier-2 and Tier-3 cities generally have a healthier air, reduced traffic, and a greater sense of community – all of which has gained particular importance after the pandemic. As a result, they are no longer regarded as compromises but as preferable destinations that are affordable and have good quality of life.
Therefore, the emergence of Tier-2 and Tier-3 cities is not only the beginning of the geographic growth but also the redesign of the Indian urban identity. They are an all-inclusive formula of development, in which development is not limited to metropolitan regions, but it also includes the sensitivities of the hinterland in India.
Affordability Equation: Smaller Cities Are Making Sense.
The housing issue in India is based on affordability. In Tier-1 cities, it is still too expensive to own a home amongst the majority of middle-class families. The real estate has been closed to the common income earners due to land shortage, increasing construction prices, and speculative prices. Unlike that, Tier-2 and Tier-3 cities provide a soothing alternative the affordable housing that does not have to be as cruel as quality, space, and accessibility.
The difference in prices is impressive. In such metros as Mumbai and Delhi the average prices of properties are between 15,000 and 25,000 per sq. ft. By comparison, such cities as Indore, Jaipur, or Kochi have homes available as low as ₹3,000 to 6,000 per sq. ft. This huge mark-up is a gateway to an even wider group of purchasers, such as first-time house owners, professionals with a regular pay, and small businesses.
Additionally, the cost of acquiring land is lower in small cities and this gives developers an opportunity to develop more affordable yet profitable projects. The larger units, better amenities and open spaces can be provided by builders, which is rapidly diminishing in metro developments. This low cost element has not only drawn in end-users, but it has also drawn the investments of those who want to get stable returns in terms of renting and capital growth.
The favorable financial conditions also make these markets affordable. The cost of ownership has been reduced to a low by home loan interest rates, government subsidies in PMAY, and tax incentives. There are also numerous state governments that provide stamp duty rebates and lower registration fees of affordable housing buyers. When these benefits are added with a reduction in property prices, it gives a load offer to the middle-income families that they cannot resist.
Tier-2 and Tier-3 cities are also supported by local employment growth to support the demand. The emergence of IT hubs, industrial, logistics parks, and learning institutions have led to the introduction of regular employment markets that are not metropolitan-based. It would mean that individuals are able to purchase housing around their workplaces, which lowers the commuting expenses and enhances work-life balance.
Even developers are not failing to realize the potential of these markets in the long-term. Companies such as Tata Housing, Mahindra Life space and Godrej Properties have started developing in Tier-2 cities by launching projects that are affordable yet have modernistic designs. Even regional developers which were limited to local markets are currently scaled up with novel funding and alliances.
Essentially, affordability in smaller cities is not only about the cheap houses, but it is a sustainable economic system. It is consistent with Indian demographic fact a young, urbanizing population that wants dignity and comfort at its means. To policy-makers, it provides a channel through which the housing gap could be narrowed down to facilitate inclusive urban development.
Infrastructure Development: The Foundation of Growth
The city cannot expand sustainably without a strong infrastructure and this is where the Tier-2 and Tier-3 cities are now making major steps. In the last ten years, India has experienced unprecedented investment in the infrastructure in the region – highways and metro lines, smart utilities and digital connectivity. These are gearing smaller cities to become well integrated and places to live and do business.
This has been facilitated by the Smart Cities Mission. Cities such as Surat, Indore, and Bhopal have introduced the best-in-the-field projects, which are waste management, water recycling, e-governance and green transportation. On the same note, integrated urban mobility systems and renewable energy programs have been implemented in Tier-3 cities like Dharwad and Tirupati. The focus on digitalization and sustainability makes sure that these cities do not develop in a chaotic way.
Maintenance of transportation network has been a game changer too. The Bharatmala and Sagarmala are some of the projects, which have enhanced connectivity via road and port, making the transfer of goods and people easier. The UDAN scheme to expand regional airports has also provided air travel opportunities to smaller towns in the country as regional airports provide direct connection with major commercial hubs. This enhanced access not only to the demand of the real estate but also to the economic activity in the local level.
Besides that, the development of industrial and economic corridors has triggered housing development. The DelhiMumbai Industrial Corridor (DMIC), the ChennaiBengaluru Industrial Corridor and the likes are establishing new points of employment within the areas that surround them. These corridors are where manufacturing companies and logistics companies are drawn which consequently leads to residential demand on the workforce they require.
The other pillar which contributes to the emergence of smaller cities is digital infrastructure. The implementation of the high-speed internet, 5G networks, and e-governance platforms has allowed businesses and professionals to work effectively in non-metro areas. This online empowerment has seen the possibility of remote employment, which has led to migration to low-cost areas.
Policy Support and Government Initiatives.
The Indian government has been instrumental in driving the affordable housing agenda to the Tier-2 and Tier-3 cities. Understanding the huge demand-supply mismatch in urban housing, the policy makers have initiated a number of plans which provide incentives to both the buyers as well as the developers.
The flagship program is the Pradhan Mantri Awas Yojana (PMAY-Urban). PMAY has made home ownership to be much more affordable by subsidizing the interest on low and middle income households to a maximum of 6.5 percent. According to recent reports, millions of homes have been approved under the scheme with a significant percentage of them being held in non-metro regions. The vision of Housing for All developed by the government specifically acknowledges smaller cities as the key to reaching the goal of universal housing coverage.
In addition to PMAY, the Credit Linked Subsidy Scheme (CLSS) has also relaxed access to inexpensive financing. At the same time, the Real Estate (Regulation and Development) Act (RERA) has enhanced transparency, increased buyer confidence and minimized risks – improving smaller markets as attractive to investors.
In the supply side, local incentives by the state governments have been proposed including reduction of stamp duties, one window clearance, and rebate on development charges. These steps will minimize project schedules and budgets on the project developer, who will tend to venture into other markets other than metros.
Besides these, there is also the Smart Cities Mission, the Atal Mission for Rejuvenation and Urban Transformation (AMRUT), as well as swachh Bharat Mission which have all led to the establishment of urban capacity in Tier-2 and Tier-3 cities. These programs all enhance civic infrastructure, water supply, sanitation and waste management which are essential facilitators of habitable housing conditions.
It has also become stronger due to policy changes in taxation and city financing. New funding avenues to the sector have been brought about through introduction of REITs (Real Estate Investment Trusts), infrastructure status of affordable housing and models of public-private partnerships. This policy ecosystem does not only stimulate construction but it also brings housing growth in line with national priorities such as the creation of jobs and sustainability.
Market Opportunity and Investor Opportunity.
To investors, Tier-2 and Tier-3 cities offer a rare combination of low cost, opportunity to grow, and stability in the long term. The smaller cities have a higher entry affordability and favourable returns due to steady demand in contrast to the saturated and volatile markets of Tier-1 cities.
Investors in real estate are increasingly becoming attracted to these areas since they offer potential rental yields as well as price growth that is not volatile. Rental yields of cities such as Pune, Lucknow, Coimbatore, and Surat have been reported to have been between 3% and 5 and these are higher than most submarkets in metro areas. More than that, the values of capital in such cities are yet to reach their maturity stage and there is a lot of room to appreciate them with the maturity of the infrastructure.
Educational hubs, IT parks and industrial estates are present which means that both rental and purchase housing will be in demand. Additionally, demographics like younger population, small family sizes, and increased urban migration favor the cycles of demand. Those investors who enter these markets early will be able to enjoy the long term growth of compounding on their investments as these cities grow to become big cities.
This potential has also begun to be identified by institutional investors as well as by the private equity firms. There are a number of funds which are currently targeting affordable housing and mid-price developments in smaller cities. Another factor that has further democratized investment is the entry of REITs and fractional ownership models so that even small investors can take part in such new markets.
Also, Tier-2 and Tier-3 cities tend to be less risky in comparison to metros. The real estate market is not as speculative and end-user based here hence price stability. There are reduced costs of land and less complex legislative conditions, thereby enabling the execution of a project to be more relaxed and fast. On the business front, developers are having better margins and risk diversification.
Since India is in the process of urbanization, as the population is estimated to be almost half of the total population living into urban areas by 2047 the housing needs will certainly leak out of the metro regions. The next frontier of domestic and international investors to join the India urban growth story, therefore, is tier-2 and Tier-3 cities.
Conclusion
The development of Tier-2 and Tier-3 cities is a radical change of the Indian urban direction. They used to be marginal players, but now they are the colorful hubs of opportunities that can provide affordable housing and the improvement of the quality of life and huge investment opportunities. Several factors are behind this change which include; economic decentralization, infrastructural developments, state regulations and evolving lifestyles.
They are the cities of homeownership that are not far but within their reach as it is to millions of Indians. To the developers and investors, they have sustainable markets that have a long-term growth potential. And on behalf of the country in general, they represent the dream of inclusive, balanced and future-oriented urbanization.
With India on its path to being a 5-trillion economy, the real estate industry will be an important part of India’s social and economic landscape. The new frontier of affordable housing, where dreams come true and communities develop, will be the Tier-2 and Tier-3 cities, which will become the engine of such transformation.
Also Read: Affordable Housing in India