What Makes The Tier 2 & Tier 3 Cities Good Places To Invest In

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When thinking about investing in real estate, many people restrict their thinking process to tier-1 cities, without even being aware of the opportunities that lie out there. Doing so, they do not even know what all they are missing out on. Read on to find out about investment opportunities in Tier 2 and 3 cities.

At the first glance, one might think of tiers 1, 2 and 3 as rankings of superiority assigned to cities but this is not the case. The tier number of a city is determined by its population and it is categorized as

Tier 1 to cities of population 100,000 and above

Tier 2 to cities of population 50,000 to 99,999

Tier 3 to cities of population 20,000 to 49,999

Tier 4 to cities of population 10,000 to 19,999

Tier 5 to cities of population 5000 to 9999

Tier 6 to cities of population less than 5000

So, what makes the tier 2 and 3 cities good places to invest in? Come, let us have a look.

Affordable Properties:

Tier 2 and 3 cities have lower property prices than metropolitan areas, making them more appealing to investors. The cost of living in these cities is also lower, making them appealing to those looking for a higher standard of living at a lower cost.

Better Rental Yields:

Rental yields in tier 2 and 3 cities are higher than that in metropolitan cities due to lower property prices and higher demand for rental properties. This makes it a more appealing investment choice for those looking for rental income.

Lesser Traffic:

A huge chunk of tie is wasted in metropolitan cities due to traffic. In Tier 2 and 3 cities, one is not stuck for long in traffic, saving one of the most precious resources: Time.

Future Growth Potential:

With the ongoing development of infrastructure, industries, and educational institutions in these cities, the real estate sector has enormous potential for growth. Tier 2 cities in India and tier 3 cities in India are turning out to be hubs for logistics and warehousing. Numerous upcoming industrial corridors are running through these smaller cities and this will provide seamless connectivity. As these cities grow, the value of real estate is expected to rise, providing investors with excellent returns on investment.

Increasing Demand:

The growing population and migration to tier 2 and 3 cities has created a significant demand for housing , commercial properties, and retail spaces. With ongoing infrastructure development and the expansion of industries in these cities, this demand is expected to rise further.

Untapped Markets:

While metropolitan cities have reached saturation points in regards to real estate development, tier 2 and 3 cities continue to offer untapped markets with enormous growth potential. Investing in these cities before they become as expensive as metropolitan cities allows investors to capitalise on this potential.

Partial uses of Tier 2 and 3 cities

It has been found that the cost of doing business per square foot is lower in tier 2 cities and tier 3 cities in India. While choosing to set up a business in tier 2 or 3 cities is generally a good idea due to the low cost of labour and real estate, provided the company has enough time, money and resources, using tier 2 and 3 cities only for specific uses also has a lot of benefits

A company could consider relocating staff involved in back-end and related functions to a nearby emerging city and save resources in the process.

Manufacturing operations could potentially be shifted to lower-tier cities, while the management functions could still be retained in tier 1 cities.

If a company's business portfolio aligns with an existing industry cluster, it may find tier 1 level capacity at lower costs in tier 2 or tier 3 cities.

Initiatives by the Government :-

The government has announced several initiatives to boost the real estate sector in tier 2 and 3 cities. These include the Smart Cities Mission, AMRUT, and the Pradhan Mantri Awas Yojana, all of which aim to improve infrastructure and create more affordable housing in these cities. The government has implemented several policies such as GST, RERA, and REITs that have made the real estate market more transparent and investor-friendly. The government also plans to open 100 additional airports and roughly 1,000 new routes, connecting smaller towns.

This has created a conducive environment for real estate investment in tier 2 and 3 cities.

Tier 2 and 3 cities to look out for

Tier 2 Cities

Nagpur

It is not surprising that the “winter capital” of Maharashtra, the cleanest and the second greenest city, Orange City, Nagpur, is considered one of the top tier 2 cities in India. It boasts of an international airport, a well-connected road network, and metro rail services, making it an appealing investment destination, especially considering the fact that the Nagpur property market is set to grow 30-35% by the 2030s.

Kolhapur

The sugar refineries in Kolhapur process more than 50 lakhs metric tonnes of sugarcane each year, contributing over ₹13 billion to India's economy. This has led to tremendous infrastructural developments. The Kolhapur Airport is currently undergoing significant expansion, including the construction of a new terminal building spanning 4,000 square meters. Additionally, the State Government has plans to develop an extensive road network covering 3,000 kilometers, with the Shaktipeeth Expressway being the longest route connecting 11 districts such as Wardha, Latur, Solapur, and Kolhapur. These infrastructure developments are expected to greatly benefit the real estate industry in the city.

Kochi

Cochin, also known as Kochi, serves as the commercial and financial hub of Kerala. With a current GDP growth rate of 8.3%, Kochi is considered one of the rapidly developing tier-2 cities. The Kochi Corporation has also earmarked ₹173 crores for various development projects in areas such as infrastructure, road construction, drinking water, and agriculture. These initiatives are expected to have a positive impact on the real estate sector in the city.

Tier 3 Cities

Bhatinda

Bhatinda, located in Punjab, is presently the fifth-largest city in the state. It hosts two modern thermal plants, namely Guru Nanak Dev and Guru Hargobind Thermal Plants, along with cement plants operated by Ambuja Cements and UltraTech Cement Limited. Additionally, the city is home to fertiliser plants, an army cantonment, and an air force station, making it a thriving commercial hub with significant potential for real estate developments. In 2020, Punjab RERA recorded a remarkable influx of 942 new project applications, further enhancing the city's appeal in the real estate sector.

Jaisalmer

Jaisalmer, also known as "The Golden City," is a city located in the state of Rajasthan, India, approximately 575 kilometres (357 miles) west of the state capital Jaipur. The real estate market in Jaisalmer is appealing, with average property prices ranging from ₹3,000 to ₹5,000 per square foot. The Rajasthan government has introduced initiatives like the Rajasthan Investment Promotion Scheme (RIPS) and the Rajasthan Tourism Policy to encourage investment and development in Jaisalmer, offering incentives and benefits to investors in the tourism and hospitality sectors. These efforts are expected to drive potential demand for real estate in the city.

Conclusion

While the low cost of real estate combined with the high yield that properties in Tier 2 and 3 cities may be enough for some, there are plenty of other reasons like increasing demand, untapped markets, strong support from the government and the like make it a very promising investing opportunity.

Article authored by: Team Propfynd

Date: 13th April, 2023

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