Small-City Real Estate Was Charming During Pandemic, Are They Still?

India's emerging real estate hotspots beyond the seven cities gained from the post-pandemic sales rush. Now, as the big-city sales are slowing down, the top 30 tier II city markets are unwinding much faster than their larger counterparts.

As per a report by data analytics firm PropEquity, the sales in top 30 tier II cities fell 13% in the third quarter — a tad deeper than the 11% drop seen in the top seven cities in the same period, as per consultancy firm Anarock.

Unlike the big cities, tier-II cities are showing stepper falls. Amritsar saw sales fall by a massive 92%, Mysuru by 61% and Panipat by 59%. Almost all the cities saw a double-digit fall in sales with the exception of Bhopal, Surat, Lucknow and Gandhinagar, where the sales fall can be described anywhere between marginal and moderate.

During the pandemic, many smaller cities saw sales growth due to non-resident Indians' investments as well as decentralisation of offices by many companies. Some of these effects are now fading away with companies taking back work-from-home policies — and professionals are now back to metros.

"The low cost of living, availability of skilled workforce and advantageous operational cost for companies, besides good connectivity and infrastructure in state capitals, have been driving demand for homes," Samir Jasuja, chief executive officer of PropEquity. 

However, as seen from an all-India context, the top 30 tier II cities have been underperforming as sales and launches with respect to top 10 cities are only one-third, the PropEquity founder said.

The charm of the smaller city markets is now unwinding for a variety of reasons, including sharp price growth as well as a slowdown in investor interest. A lot of end users are also calibrating their real estate investments in smaller cities.

"Besides genuine demand, these smaller cities drove a significant investor demand in the post-pandemic world when many people wanted to invest in their own hometown amid uncertainties," Prashant Thakur, head of research at Anarock Group, said. "With life returning to normalcy, top seven cities have once again attracted a high number of individuals for investments either to earn a steady rental income or purely from reselling point."

As many as 24 out of the top 30 tier II cities showed a double-digit surge in launch prices between financial year 2020 and the last fiscal. Six recorded single-digit price appreciation, according to PropEquity. The top 10 of the list of tier II cities saw prices rise in the range of 54–94%.

Unlike in the top seven cities, few tier II cities could absorb this steep price growth. "Besides investors, it is also difficult for many genuine end users too to buy a home as prices have gone up significantly. Resultantly, sales are dipping, followed by a fall in new launches. However, we expect activity to gain some momentum in the ongoing festive quarter," says Thakur.

The attractiveness of the real-estate market for investors lies in capital appreciation, which seems to have changed with a steep price appreciation. Most North Zone markets in and around the National Capital Region like Mohali, Sonepat, Panipat and Agra saw steep fall in sales, followed by Raipur.

"Real-estate investment has historically not been very lucrative in tier 2 cities," said Rochak Bakshi, CEO of True North Financial Services. "Despite the growth in connectivity and infrastructure, these cities have failed to generate the kind of return that will attract investors."

The cost of managing a property combined with poor rental yields, not-so-great appreciation in capital value and highly illiquid nature make investment in these cities highly risky, according to Bakshi.

New supply is correcting at a much faster clip in tier II cities as well. The new supply addition in the top 30 cities fell as much as 34% (as per PropEquity) — a far cry from the 19% fall seen in top seven cities (as per Anarock). Agra, Mysuru, Sonepat, Panipat, Thiruvananthapuram, Vijayawada and Visakhapatnam saw very steep fall in supply addition as of the third quarter.

While the overall market looks glum, not all tier II city markets are in the red. There are two cities that emerge as bright spots in an otherwise-fading market. Coimbatore, known for its garment market, saw a spectacular 23% rise in home sales and 77% rise in new supply in the third quarter.

As per a report by Colliers, Coimbatore has good impact in three areas — office, residential and warehousing potential. It is also being positioned as an emerging startup and IT capital.

Dehradun, which is being developed as a smart city, also saw a 47% rise in sales and 100% rise in new supply. Bhopal, also being developed as a smart city, saw a mere 4% fall in sales, and saw its new supply rise by a spectacular 268%.

Diamond city Surat, which is a consumption centre, has potential in four areas — residential, warehousing, retail as well as data centres. It saw a marginal fall in sales and flat supply addition.

Experts however see long-term potential in many more emerging cities. "Smaller towns are emerging as dynamic contributors to India's economy, driven by improved infrastructure, affordable real estate, skilled talent, and government initiatives," said Badal Yagnik, chief executive officer of Colliers India. "This growth is set to propel the real estate sector to an estimated $1 trillion by 2030 and potentially $5 trillion, a 14–16% share in GDP by 2050."

While capital cities might see continued growth, real-estate growth below the top 10 tier II will be driven by infrastructure addition, proximity to industrial corridors as well as their ability to deliver on their pandemic-era promise. 

Katya Naidu is a senior business journalist who writes about equity markets, startups, energy, infrastructure, real estate and healthcare.