Does it make economic sense to invest in real estate sector in tier2 cities?
As Indians, we love our real estate. We can see it, stand on it and experience it. It also generates income, and if held long enough, helps grow our money. But the sector has been in the doldrums for the past few years, taking away much of the popular interest.
Yet, some die-hard enthusiasts remain bullish about this asset class. Some consider investing in tier-2 cities lucrative. What should you consider before investing? Here are some pointers:
“Tier-2 cities can potentially offer two important advantages—price and growth potential,” said Ramesh Nair, CEO and country head, JLL India.
But not everyone agrees. “From an investment point of view, tier-1 cities should be considered over tier-2 cities,” said Mir Jaffer Ali, founder and CEO at PropUrban, a Bengaluru-based global real estate investment advisory.
There are also many whose views fall in the middle of these two extremes. Amit Oberoi, national director, knowledge systems, Colliers International India, said: “It’s all the same whether one invests in a tier-1 city or a tier-2 city. Returns from investing in real estate depend on the intrinsic characteristics of the property and its location.”
He believes investment in residential real estate should take into account factors such as amenities in the project, developers’ track record and location—such as proximity to a centre of employment. However, in the current market scenario, Oberoi is not optimistic about investing in real estate, be it in a tier-1 or tier-2 city.
“Currently, the market is subdued and no appreciation is expected in the next six months or so. One should look to invest in real estate only if one has an investment horizon of 5-10 years,” he said.
If you are still enthused by the tier-2 story, you need to be careful while selecting the city. “Hitting the bull’s eye with property investment in a tier-2 city depends a lot on the city and whether one has selected a viable micro-market and property typology within that market,” Nair said. “If one has to invest in tier-2 cities, consider cities that are emerging; cities in the list of 100 smart cities may be better options,” Ali said.
If you are planning to invest in tier-2 cities, you need to take precautions. “Due diligence of property titles and developers is more difficult in tier-2 cities, and one should take utmost care in doing it,” said Ali. Besides, investing in cities other than the one in you reside in brings its own set of responsibilities.
“Investing in a property in cities or towns other than those of one’s residence can mean that one will not be able to inspect them regularly,” said Nair.
If it is tenanted, there are certain duties that a landlord must fulfil, and rent collection also needs to be reliable. The property needs to be maintained and all statutory charges need to be paid to local authorities.
Therefore, apart from keeping in mind other criteria, if you want to invest in a tier-2 city, look to do it in a city or town that is close to where you live, or one that you can visit often.