Real estate investment has always been a popular choice for investors looking to grow their wealth over the long term. While Tier-1 cities have always been the most lucrative markets, in recent years, Tier-2 and Tier-3 cities have emerged as great alternatives. With the growth of these cities, both in terms of population and infrastructure, real estate investment in Tier-2 and Tier-3 cities has become the next big thing. So, in this article, we will explore why real estate investment in Tier 2 and Tier 3 cities is gaining momentum.
A Quick Overview about Tier-1, Tier-2 and Tier-3 cities in India
Before we get into why Tier-2 and Tier-3 cities are becoming attractive for real estate investment, let's first understand what these terms mean. In India, the cities are categorised based on their population and economic activity. Tier-1 cities are the most developed and populated cities, including Mumbai, Delhi, Chennai, Kolkata, and Bangalore. Tier-2 cities include Ahmedabad, Bhopal, Jaipur, Lucknow, and Surat. Tier-3 cities are smaller cities with lower economic activity and population.
So, without further ado, let's get started!
1. Low Entry Cost
Low entry cost is a huge benefit for real estate investors because land and property prices are much lower in Tier-2 and Tier-3 cities. This makes it easier for investors to buy a property in these regions and earn rental income. Subsequently, the rental yield is higher in Tier 2 and Tier 3 cities, which makes it an attractive investment option for those looking for regular income from property investment.
2. Higher Potential for Growth and Development
Most Tier-2 and Tier-3 cities are gradually transforming into economic powerhouses and contributing to the state and national GDP. Rising connectivity and infrastructure development have added to the economic boom. For example, Lucknow, in recent years, has expanded its periphery and attracted millions to investmenting in properties. New businesses and companies have set up operations, thus boosting employment and the local economy. Lucknow is now a connecting link between other cities of the state and the National Capital Region (NCR).
Cities like Indore and Ludhiana are now a part of the country's developing multi-modal logistics network, which promises to strengthen the supply chain in the country. Amritsar and Kochi are already well-known international tourist destinations. Several of these cities now have their own special economic zones. This in turn promotes potential employment opportunities in these cities.
3. Rising Demand for Affordable Housing
With the increase in urbanisation and the growth of the middle class, there is a growing demand for affordable housing. Therefore, Tier-2 and Tier-3 cities have witnessed higher housing demand than Tier-1 cities. As a result, the demand for residential properties in these cities is expected to rise in the coming years, providing an opportunity for investors to earn good returns. The demands for it are on a rise due to the availability of financial options, increased level of incomes, emergence of nuclear family culture.
4. High Capital Appreciation and Rental Yield
As previously stated, investments made in Tier-2 and Tier-3 cities can grow because of their lower average prices, steady growth rate, and availability of open spaces in and around their properties. As a result, the upcoming group housing projects in these cities are more likely to offer capital appreciation and higher rental yields. Rental yields for commercial properties in Tier 2 and Tier 3 cities can be as high as 12-15% and 5-7% for residential properties. Since these cities are on a steady rise, it can be forecasted that the investments made will be profitable in the long run.
5. Risk Diversification
Lastly, investing in real estate in Tier 2 and Tier 3 cities helps to diversify the risk. Investing in multiple properties across different cities reduces the risk of loss due to unforeseen circumstances like natural disasters or economic downturns in a particular region. This diversification helps create a stable and varied investment portfolio that is less susceptible to market fluctuations.
In addition to Tier-1 metros, a significant portion of the housing demand will come from Tier-2 and Tier-3 cities in the coming years. However, investors must be cautious and conduct thorough research to mitigate risks like lack of transparency, delayed housing projects, etc. With the right approach, real estate investment in Tier-2 and Tier-3 cities can be profitable and rewarding for those looking to grow their wealth in the long run.
PropertyAngel is a leading O2O (online-to-offline) second landlord platform. We are a Bangalore-based property management company offering professional property management for individual apartments, houses, and villas. Contact us at (91-80-47095974) or (91-7406484455) if you need guidance on how to invest in the right property in Bangalore.