Grade-A real estate companies have been expanding their footprints from top-tier cities to tier-2 cities lately. A combination of factors such as affordability, relatively higher growth potential in untapped regions, and improving infrastructure, is enticing realtors and homebuyers towards tier-2 cities such as Agra, Chandigarh, Goa, Jaipur and Nagpur.
This also helps realtors lower the concentration risk since a large number of their offerings are still housed in tier-1 cities of Mumbai, Delhi-NCR, Bengaluru and Kolkata. But a gradual shift is already underway.
Godrej Properties Ltd, Prestige Estates Projects Ltd, Brigade Enterprises Ltd, Sobha Ltd and Puravankara Ltd are among developers who have exposure to tier-2 cities of Indore, Nagpur, Kochi, Calicut, Mangalore and Ooty. Of course, it goes without saying that launches and pricing trends in tier-1 cities remain crucial drivers for listed real estate companies as these are considered hubs of financial and economic activities.
Even so, tier-2 cities are seen as paving the way for the next leg of growth. In fact, the average price for a housing unit in at least 17 tier-2 cities was quoting above ₹6,000 per sq ft in 2024 – which was higher than some tier-1 markets, showed data by PropEquity sourced by Elara Securities (India). This bodes well for realisations and margin outlook of realtors operating in these markets.
“Some key notable tier-2 markets offering market depth (over ₹7,000 crore of absorption value in the primary market) include Bhubaneswar ( ₹8,300 crore), Gandhi Nagar ( ₹12,500 crore), Nashik ( ₹7,700 crore), Indore ( ₹10,600 crore) and Surat ( ₹17,000 crore),” said the Elara report dated 24 February.
Market depth means a market’s ability to absorb a relatively large supply without impacting prices significantly.
While the thrust on affordable housing or ‘housing for all’ by the Indian government has been there for quite some time now, there is a rising preference for homes developed by quality or Grade A developers even in smaller cities and towns akin to tier-1 cities. This could help companies increase their market share gains by offering a diverse set of options to buyers in these markets. Execution is crucial here as the requirement and nature of customer profile may be different in each market.
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Warehousing demand
These cities are also emerging as a new alternative to meet India’s warehousing needs. Property consultant JLL India notes that in 2024, India’s total warehousing stock reached 533.1msf, with emerging tier 2-3 cities now contributing approximately 100msf, or about 18.7% of the total stock – a fourfold increase since 2017 when the goods and services tax (GST) was implemented. Setting up smaller warehouses in these cities is expected to help companies improve delivery times and reduce logistics costs.
“These cities also offer access to larger spaces due to lower population density, ideal for warehouses near consumption centers,” according to JLL. Further, the government’s infrastructure initiatives such as PM Gati Shakti, Bharatmala, Sagarmala, UDAN Scheme, and the development of freight corridors have also helped bring tier-2 and tier-3 cities into the limelight as distribution networks amid India’s booming e-commerce culture.
But as of now, listed real estate stocks are on a wobbly footing amid a broader market correction, hurting valuations. Jefferies India notes that real estate stocks under its coverage are trading below average net asset value (NAV) levels seen over the long-term / listing.
“With DLF trading at a large 36% NAV discount (versus 19% average) and Godrej Properties at less than half the average PE premium; the two stocks are now building in significant pre-sales weakness; while ignoring the significant balance sheet improvements over the long run,” said the Jefferies report on 27 February.
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