Should you invest in the real estate in tier-2 cities?
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As Indians, we love our real estate. We can see it, stand on it and experience it. It also generates an income, and if held long enough, multiplies our money. But the sector has been in the doldrums for the past few years, taking away the popular interest. But some die-hard enthusiasts are still bullish about this asset class. However, the current enthusiasm is not just for traditional realty hotspots in the big cities. There are many who are also upbeat about investing in tier 2 cities of the country.
Here, we try to look at what makes investments in tier 2 cities lucrative. What are some of the things you should consider before investing there? Here are some pointers:
Should you invest?
According to the Magicbricks survey, low property costs, government’s focus on smart cities and lower costs of living, are some of the factors that attract investors to tier 2 cities. However, experts are divided on whether one should invest in tier 1 or tier 2 cities.
“Tier 2 cities can potentially offer two important advantages: price and growth potential,” said Ramesh Nair, chief executive officer and country head, JLL India. But there are those who disagree. “From the investment point of view, tier 1 cities should be considered over tier 2 cities,” said Mir Jaffer Ali, founder and chief executive officer, PropUrban, a Bangalore-based global real estate investment advisory.
There are many views that are in the middle of these two extreme views. 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 that investment in residential real estate should take into account factors such as amenities in the project, developer’s 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 the real estate, be it a tier 1 or tier 2 city. “Currently, market is subdued and no appreciation is expected in next 6 months or so. One should look to invest in real estate only if one has an investment horizon of 5 to 10 years,” he said. If you are still feeling enthused with the tier 2 story, you need to be careful while selecting the city. “Hitting the bullseye, with property investment in a tier 2 city, depends a lot on which city has been identified and whether one has selected a viable micro-market and property typology within that market,” added Nair. “If one has to invest in tier 2 cities, consider the cities that are emerging; cities that are in the list of 100 smart cities projects may be a better option,” said Ali.
If you do invest
If you are planning to invest in tier 2 cities, you need to take extra 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 that, investing in cities other than the one in which you reside, 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 the rent collection also needs to be reliable. The property needs to be maintained and all statutory charges need to be paid to local authorities. One can lose track of such functions if one is not stationed in the same city, Nair added.
Therefore, apart from keeping in mind all 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. You can also go to a city where your close relatives or friends reside; as they can help you manage the property.