Tier-2 Market - A Dark Horse In The CRE Space

Tier-II cities are becoming increasingly popular for commercial activity due to their overall affordability, economic stability, range of alternatives, and low competition in real estate. This trend looks set to continue with the expansion of infrastructure and construction along metro pathways. Let’s look at how this pegs the tier-II market as a frontrunner.

Mapping the current market dynamics

• In order to facilitate the expansion of their respective enterprises, startups, SMEs, and businesses operating within the finance and e-commerce industries are directing their attention towards burgeoning economic hubs and smaller urban centers.
• To increase leasing, businesses in the manufacturing and logistics sectors are expanding their business in lower-tier cities and developing logistical hubs.
• Last year, 2.5 million square feet of mall space were available in Baroda, Budaun, Indore, Nagpur, and Udaipur - a 91% increase from the previous year.
• Consumers in Tier II cities increasingly prefer branded goods which create favorable conditions for retail sector expansion across the country.
• In terms of cost, tier-II urban centers offer a more economical alternative to their tier-I counterparts.
• According to the categorization by the Reserve Bank of India, tier-II municipalities are home to 50,000-99,999 inhabitants.

What makes tier-II markets a hotbed for real estate activity?

Tier-II cities in India are expected to be the development engines due to advancements in the real estate market, business climate, quality of life, and sustainability. Let us took at the few factors that is propelling the growth of CRE in these cities

• The pandemic served as a trigger and significantly increased commercial activity levels in Tier-II economies.
• Reverse migration has been seen, and organizations have opened offices or expanded into these areas for various reasons such as work-life balance, savings, and quality of life.
• Reduced concerns regarding migrant labor and diminished construction restrictions amid the COVID-19 pandemic.
• Enhanced revenue potential for property developers, attributed to more affordable land prices.
• Escalating real estate costs yet remaining significantly below those of the leading ten urban centers.

Factors driving the tier-II markets' unprecedented growth for commercial development

In tier-2 cities that link the industrial corridors, there are unquestionably multiple reasons for the surge in demand for commercial real estate.

• According to the United Nations' global urbanization report, by 2025, 37% of India's populace will inhabit urban areas, signaling the expansion of tier II cities.
• The widespread adoption of the 'work from home' paradigm during the Covid-19 crisis has sparked a reverse migration wave. Consequently, companies are now seeking skilled professionals in India's rural regions rather than relying on the workforce migrating to tier-I cities for job opportunities.
• The cost of conducting business per square foot is almost half that of tier-1 cities' commercial areas.
• Small and medium-sized businesses can continue to operate on the fringes of industrial pathways if they are a member of the distribution networks to the major companies there.
• Near the borders of industrial routes, logistics, and warehousing will become the investment centre. In tier-II cities, manufacturing facilities seek commercial premises to take advantage of the first-mover differentiation strategy.
• Lastly, tier-II cities lacked independent engines of economic activity. The expense of transportation has long been a problem for enterprises. However, the industrial pathways are today's bridge and help small and medium-sized firms remain profitable.

The uprising of  startups in tier-II cities

The abundance of talent, local investor confidence, and supportive infrastructure have facilitated the expansion of businesses and startups in these areas. Entrepreneurs are using the university graduates' skill pool, which has gone chiefly unexplored.

Since tier-I cities struggle with factors including rising wages and urbanisation, among others, tier-II marketplaces serve as an additional or alternative site of employment. In addition, the tier-II market has made it possible to work remotely while keeping prices down.

In their training period, startups in tier-II cities can test their business strategies in a limited market and might be a more affordable choice. Several companies have emerged in the previous five years, not just from tier-I cities but also from tier-II cities.

As part of their expansion plan, some businesses that initially began in tier-II markets later opened additional offices in tier-II cities. However, companies with headquarters in tier-I cities that serve the whole nation frequently establish auxiliary offices in tier-II cities as centres to service remote areas of India.

• The abundance of talent, local investor confidence, and supportive infrastructure have enabled the expansion of businesses and startups in these areas.
• Entrepreneurs are utilizing the university graduates' skill pool which has gone largely unexplored.
• Tier-2 marketplaces serve as an additional or alternative choice of employment as Tier-1 cities struggle with factors like rising wages and urbanization.
• Remote working is also possible while keeping prices down in tier-II marketplaces.
• In their testing period, startups in tier-II cities can assess their business strategies in a limited market and might be a more economical option.
• Over 61,000 acknowledged startups span across 55 sectors in India, with a noteworthy 45% of them finding their homes in tier II and tier III urban centers.
• The appealing economic atmosphere and well-developed connectivity infrastructure, complemented by the relatively budget-friendly property prices, are enticing businesses to set up their operations in these locales.
• As part of their expansion plan, some businesses that initially began in tier II markets later opened additional offices in tier II cities.
• Companies with headquarters in tier-I cities servicing the entire nation often establish auxiliary offices in tier-II cities to service remote areas of India.

NRIs' Role In Fostering Urban Growth

• While initially, NRIs used to focus on tier 1 cities, their inclinations have now evolved to include tier-II cities. This offers them the opportunity to stay close to their roots while also reducing their cost of living.
• Developers are entering these areas, thus increasing confidence among both domestic and foreign clients.
• The land in these cities is more affordable, extensive, and open, which allows for the development of attractive facilities that can improve quality of life.
• Projects in these cities can provide higher returns on investment compared to those in tier 1 markets due to the rising economies of these markets.

Government Initiatives

• Underdeveloped yet highly prospective tier-II cities in India deserve more attention from both state governments and Indian real estate companies.
• Goa is one such example, where the State Government has been working with Software Technology Parks of India (STPI) to boost software exportation and promote digital entrepreneurship in the tourist state.
• The Make in India program is being employed by several states to promote industrial production in their tier 2 cities. Key factors driving this growth include higher land availability, affordable cost of living, developing infrastructure and connectivity, creation of manufacturing hubs, increasing focus on green spaces, access to the skilled talent pool, etc.
• Local authorities are implementing industrial hubs, Special Economic Zones (SEZs), and skill enhancement programs to entice IT corporations, ultimately leading to an influx of employment and investment in these urban centers.
• Organizations such as NASSCOM, ASSOCHAM, and TIE bolster innovation and entrepreneurship in smaller cities by offering resources like funding, guidance, incubation, and networking possibilities.
• The easing of the Department of Telecommunications' regulatory guidelines, allowing IT firms to operate remotely during the Covid-19 pandemic, is anticipated to reinforce this trend. This flexibility enables businesses to establish themselves in smaller cities and towns where expenses may be more economical.

Conclusion

The central government's Smart City mission, which is now in its peak phase, will significantly impact the development of commercial real estate in tier-II cities in the future. This objective will have a substantial impact on the urban population and might, over the course of several decades, drive tier-II commercial real estate development to new heights. After development, the need for commercial and warehouse space is anticipated to increase in smart cities.

From the residential real estate perspective, the tier-II market provides more viable living and working conditions. After all, several industries are investing significantly in technology infrastructure, enabling their personnel to work remotely. So, after accepting the new standard, these businesses are unlikely to change their ways because it also allows them to save money on office space.

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