Tier-II And III Cities Lead Housing Sector Growth

While it is a common belief that top metro cities drive residential real estate growth, data shows that it is actually the Tier-II and III cities, which have been leading India’s expanding home loan market, which grew at a compounded annual growth rate (CAGR) of 16% between FY13 and FY18 from Rs 4.6 to 9.7 trillion.

While outstanding home loans in districts comprising leading four metros - Delhi, Mumbai, Chennai and Kolkata – grew at 8 to 12% during this period, Tier II and III cities across 50 districts exhibited a growth rate ranging from 15 to 36% between FY13 and 18, according to a JLL Research analysis of the latest RBI home loan data.

The highest CAGR of outstanding home loans was recorded in Tamil Nadu’s Kanchipuram (36%), followed by Gandhinagar and Thiruvallur standing at 29%, and Varanasi, Surat and Valsad at 26%.

Mohit Bhambri, Director, Hedge Homes, said that investors seem more interested in investing with Tier-II and III cities because these sectors are leading the growth in the real estate market.

“The ticket sizes for residential properties in these cities and towns start from a significantly lower base, owing to cheaper land prices and also the fact that developers active there are more aligned with affordability,” he said.

Ramesh Nair, CEO and Country Head, JLL India, said that because of lower land and manpower costs, real estate developers in smaller cities have been able to provide homes at competitive rates while also adopting the latest construction and development trends, which has in turn fuelled demand for residential housing in those cities.

“The home loan data demystifies the common perception that districts comprising the top leading cities drive residential real estate growth. The data clearly indicates that with development focus gradually reaching to peripheral regions, tier II and III cities of the country have attracted the homebuyers’ interest,” he said.

As per the RBI home loan data, the share of the top four metro districts to the overall outstanding home loans in the country dropped from 22 to 16% during the 6 year period and in comparison, the share of the rest of India increased to 84% from 78%.

Dr. Niranjan Hiranandani, National President of NAREDCO, and Co-founder and MD of Hiranandani Group, feels that Tier-II and III cities are catching up with metro and Tier-I cities. “Innovation and newer lines of development and growth are happening in Tier-II and III cities. These are locations where, thanks to GST and removal of Octroi, new trails are being blazed and new segments as also new products are gaining traction, at a quantum not seen before. Obviously, given the changing paradigm of doing business in real estate, in the post-RERA and GST world, the previous patterns which were seen more in metro as also Tier-I cities, are witnessing slower off-take, while tier-II and III cities are witnessing quicker growth and development,” he said.

Also, small-scale projects with relatively shorter completion periods, developer-buyer connect and higher visibility on timely completion led to increased sales of homes, added Nair.

According to Rohit Poddar, Managing Director, Poddar Housing and Development Ltd, the massive gap between supply and demand of the housing units due to the sky-rocketing property prices in space-crunched metro cities has forced the home buyers to opt for an affordable alternative to own a home.

“Developers are also shifting their focus towards the tier-II and tier-III cities after the meaningful intervention of government policies which are building a positive ecosystem for residential developments and investment cycle in these regions,” he says.

“In addition to these, various policy initiatives like the Smart City Mission, development of industrial corridors, the Atal Mission for Rejuvenation and Urban Transformation, metro rail projects, Prime Minister Awas Yojana (Urban) and Make in India, have added value to the overall buying sentiments within these markets,” said Samantak Das, Chief Economist and Head of Research, JLL India.

“The impact of these national-level projects is expected to be long term and will make these cities more attractive destinations for various industries as well as residential real estate. The trend is prominently visible in the peripheral markets of top metro cities,” added Das.