Are Small-city Real Estate Markets Still Appealing?

India’s tier II cities, which witnessed a surge in real estate activity during the pandemic, are now showing signs of cooling, with sales declining more rapidly than in the country’s top seven cities. As per data from PropEquity, sales in the top 30 tier II cities fell by 13% in the third quarter, surpassing the 11% drop recorded in India’s major metropolitan areas. This trend signals a shift as the pandemic’s real estate boost in smaller cities begins to unwind, especially in cities like Amritsar, Mysuru, and Panipat, where sales plummeted by 92%, 61%, and 59%, respectively.

During the pandemic, the decentralisation of corporate offices, driven by work-from-home models, led many professionals and non-resident Indians to invest in properties outside the major metros. With these models now retracting and professionals returning to urban centres, the demand in smaller cities has softened. CEO of PropEquity, highlights that while tier II cities initially benefited from lower living costs and improved infrastructure, the economic allure of larger cities is drawing back many residents. Moreover, high price increases have dampened investor interest. According to PropEquity, 24 out of the top 30 tier II cities saw double-digit increases in property prices between 2020 and the last fiscal year. These steep price rises have made it challenging for investors and end-users alike to sustain real estate investments in smaller cities, resulting in both a dip in sales and a 34% reduction in new property launches across these cities, compared to a 19% reduction in metro areas.

Despite these declines, certain cities, such as Coimbatore and Dehradun, stand out with notable resilience. Coimbatore reported a 23% increase in home sales and a 77% rise in new supply, driven by its growing reputation as a startup hub and its strong industrial base. Similarly, Dehradun recorded a 47% increase in sales, benefitting from its designation as a smart city. Cities like Bhopal and Surat have also shown stability, with moderate dips in sales and significant new supply, reflecting the potential of emerging markets where infrastructure development aligns with economic growth.

According to CEO of Colliers India, the long-term prospects for India’s smaller towns remain positive. These cities, benefiting from infrastructure upgrades, government initiatives, and a steady talent pool, are expected to play a vital role in India’s economic expansion. Yagnik suggests that the real estate sector could reach $1 trillion by 2030, with the potential to represent 14–16% of the GDP by 2050, provided these smaller cities continue to support industrial growth and infrastructure enhancements.