In recent years, a significant shift has been witnessed in the preferences of real estate investors in India. The investment landscape is changing, with Tier 2 and Tier 3 cities becoming more popular destinations after previously being dominated by metropolitan areas.
This upsurge has attracted investors looking to create a larger presence in Tier-II commercial real estate and capitalise on the advantages these rapidly developing hubs of economic advancement provide.
The commercial real estate market is expanding rapidly, which is encouraging the creation of new businesses, job centres, and integrated townships. These developments are the foundation of these cities’ economic development.
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Understanding The Commercial Sector
Being the top choice of savvy investors, India’s commercial real estate is expected to grow at a CAGR OF 13% between 2022-2027. As compared to their metropolitan counterparts, Tier II cities are experiencing a notable surge in commercial activity, primarily due to factors like affordability, pricing stability, and lower levels of competition.
Furthermore, it is anticipated that the value of Indian real estate will reach $1 billion by 2030, with commercial real estate playing a significant role in promoting the sector’s expansion. Real estate investors have long viewed investing in commercial real estate as a lucrative option that offers opportunities for capital appreciation, high return on investment, and passive income but only HNIs and ultra rich could afford to invest in CRE until now due to substantial upfront investment.
Fractional ownership of CRE is emerging as a promising concept for reliable investments that would provide long-term capital appreciation and daily returns as well with a comparatively lower entry barrier starting at just Rs. 25 lakhs. Fractional ownership real estate ownership is advantageous for regular people seeking to make profitable investments due to its low risk and high return advantages.
Factors Driving Investment in Tier 2 and Tier 3 Cities
Indians are still inclined to invest in real estate, but they are turning their attention away from traditional metropolitan hotspots and towards smaller cities. According to ANAROCK’s Consumer Sentiment Survey, almost 26% of real estate investors have a preference for Tier 2 and Tier 3 cities, which supports this line of thought.
A report by The Financial Express states that commercial real estate development in Tier 2 and Tier 3 cities in India is witnessing a profound transformation. The growth of major retailers and corporations looking for opportunities for expansion in smaller towns, as well as infrastructure advancements like improved connectivity through new road networks, railways, and metro systems, all contribute to the development of commercial infrastructure and commercial real estate investment in these cities.
- Affordability: A primary driving force is affordability, since the price of real estate in large cities can be expensive. But the attractive growth prospects that these smaller cities offer are just as much of a factor in the spike in interest as are the affordable property prices. Cities classified as Tier 2 or Tier 3 differ from their more crowded metropolitan counterparts in that they have the capacity for creative and progressive infrastructure development.
- Prospective Market: Unexplored markets and consumer groups in Tier II cities have the potential to promote company expansion. Different from more crowded Tier I markets, companies might find it simpler to establish a dominant position in these cities.
- Diversification Strategy: In order to minimise the risks associated with an excessive dependence on a single location, businesses often aim to diversify their geographical presence as they grow. Cities in Tier II offer great diversification opportunities.
- Investment and Economic Growth: Industrialization, rising consumer expenditure, and government subsidies are often the main drivers of economic growth in Tier II cities. Growing cities draw investment from both domestic and foreign sources because they present a more affordable business environment than larger metropolitan areas.
- Infrastructure Development: Tier II cities have become more accessible with improvements to their roads, highways, trains, and airports. Modern infrastructure makes it easier for people, products, and services to move around, which attracts businesses to these cities.
Promising Sectors for Investment:
According to an article by BusinessWorld, the real estate sector in Tier 2 and 3 cities in India is rapidly growing due to the saturation of the real estate sector in metro cities and the growing economic significance of towns and further mentions that commercial properties like office spaces, warehouses, co-working, retail, etc., have seen a surge in demand in tier 2 & 3 cities.
Several commercial real estate sectors in Tier-2 cities are ripe for investment:
- Office Space: The rise of IT, start-ups, and flexible work models is driving the demand for modern, co-working, and managed office spaces.
- Logistics and Warehousing: E-commerce growth and improved connectivity are boosting the demand for efficient logistics and warehousing facilities.
- Retail: Growing consumer spending is creating opportunities for shopping malls, high-street retail, and entertainment centers.
- Hospitality: Increased tourism and business travel are leading to a demand for hotels, serviced apartments, and boutique accommodations.
- Healthcare: Expanding healthcare infrastructure and rising healthcare needs are creating opportunities for hospitals, clinics, and medical facilities.
Challenges and Considerations:
While the potential is undeniable, some challenges need to be considered:
- Limited liquidity: Compared to Tier-1 cities, the commercial real estate market in Tier-2 cities is less liquid, making exit strategies crucial.
- Supply-demand mismatch: While demand is growing, development often lags, leading to potential supply shortages in certain sectors.
- Infrastructure gaps: While improving, infrastructure in some Tier-2 cities might not yet match the needs of larger businesses.
- Market knowledge: Investors need strong local market knowledge to identify the right opportunities and navigate regulatory complexities.
Investing in Tier-2 Cities: Tips for Success
For investors looking to tap into the potential of Tier-2 cities, here are some tips:
- Conduct thorough research: Understand the local market dynamics, identify growth sectors, and assess potential risks and returns.
- Partner with local experts: Collaborate with experienced real estate consultants and investors who have a deep understanding of the Tier-2 city landscape.
- Focus on quality and sustainability: Invest in well-located, well-designed properties that adhere to green building standards and cater to evolving needs.
- Adopt a flexible approach: Be prepared to adapt to changing market conditions and embrace innovative solutions like co-working spaces and mixed-use developments.
- Build long-term relationships: Cultivate relationships with local businesses and government authorities to build long-term value and navigate regulatory hurdles.
How Fractional Ownership is Making Your Tier-2 Dreams More Accessible
Alongside traditional investment methods, a rising star shining in the commercial real estate market is: Fractional ownership.
While the potential of Tier-2 cities is undeniable, the initial investment required can still be a hurdle, especially for smaller investors. Fractional ownership can be a huge game changer in this scenario. It allows you to own a piece of a high-value commercial property in Tier-2 cities, without having to shoulder the entire cost.
Benefits of Fractional ownership for Tier-2 city Investments:
- Lower entry barrier: Fractional ownership makes investing in premium commercial properties in Tier-2 cities accessible to a wider pool of investors, even with smaller budgets.
- Diversification: Spread your investment across multiple properties and sectors within a Tier-2 city, mitigating risk and maximizing potential returns.
- Liquidity and flexibility: Fractional ownership platforms often provide easier entry and exit compared to traditional real estate investments, offering greater liquidity and flexibility.
- Professional management: Benefit from the expertise of experienced property managers who handle the day-to-day operations and maintenance of the shared asset.
Assetmonk is one of India’s best alternative investment platforms born out with the vision to democratize real estate investment and make it accessible to everyone.
It offers a fractional ownership model where investments are secured and starts as low as 25 lakhs and offer a high potential earning yield of 14 to 21% annually.
Investing in fractional ownership opens up new avenues for investors and also lowers investment costs and reduces risk.
Here’s how Assetmonk empowers Investors like you to capitalize on this exciting market:
- Lower entry barrier: With Assetmonk, you can own a fraction of a high-value commercial property in a Tier-2 city, starting as low as 25 lakhs. This makes investing in prime locations a reality, even with limited capital.
- Diversification: Spread your investment across different sectors and properties within Tier-2 cities. Assetmonk offers a curated portfolio of diverse offerings which diversifies your risk and maximizes your potential returns.
- Due Diligence: Due diligence by reputable third-party partners for title, legality, and valuation. Investor friendly deal terms worked out with owners or developers.
- Profitable Exit: If an investor decides to sell their share, and the asset has appreciated in value, they could make a profitable exit. Fractional ownership is a desirable option for investors due to the possibility of a profitable return on investment.
- Professional management and transparency: Assetmonk takes care of Product management and yield distribution.You can reap the benefits of professional expertise without the burden of day-to-day operations. Plus, their transparent platform keeps you informed about every step of the process.
The Future is Bright for Tier-2 Cities:
In India’s evolving startup ecosystem, focus is gradually shifting from the busy big cities to the developing potential of Tier-2 cities. The country is rapidly urbanising, according to the report, with the rate rising from 32% in 2013 to 36% in 2023. This is shifting attention to areas with the potential to grow and benefit from being the next big commercial real estate destinations.
Investing in Tier-2 cities’ commercial real estate is not without risks, but the potential rewards are significant. With their robust economic growth, favorable demographics, and evolving infrastructure, Tier-2 cities are poised to become the next engines of India’s real estate growth story.
Bottom Line
The best Tier 2 cities in India are appealing to investors for both residential and commercial properties because of their strong economic growth, well-developed infrastructure, and excellent standard of living. They offer a combination of quality, affordability, growth, and potential that is hard to come by in Tier 1 cities.
However, you need to do a lot of research and carefully assess the risks and challenges associated with investing in Tier 2 cities before making a decision.
These smaller cities will be essential for establishing the direction of real estate investment in the nation as investors expand their horizons and diversify their holdings.
One of the best alternative investment platforms in India is Assetmonk, which offers investors outstanding real estate-backed alternative investment options. The asset-backed investment products come with an assured Internal Rate of Return (IRR) of 17%. Investors are also assured of a smooth exit strategy.
These investment options are chosen with care from the thriving private markets in India, and a trustee registered with SEBI is in charge of them. The good news is that investors may be eligible for tax benefits of up to Rs 50,000, which allows them to invest easily and earn attractively high returns and it only takes a minimum investment of 10 lakhs to enjoy the benefits of stress-free investing and rewardingly high returns.
