Tier II and III cities: The next growth story

WHAT WENT WRONG

That said,every developer was inspired to create a national footprint six to seven years ago. While this was a worthy ambition,it was poorly conceived as a plan since many of them did not factor in state government-level regulatory challenges such as local municipal laws. They also did not consider that they may not have had the requisite financial resources,organisational depth and knowledge of the local markets to manage and execute projects in Tier II and Tier III cities. Nor had they accurately gauged the demand fundamentals of these locations.

Such developers proceeded to enter into land acquisition on their own equity and were caught short-footed,not realising that the property cycles were then at their peak,and that there was bound to be a correction if not a fall.

THE DAWN OF REASON

Major players are now going to re-align their positions vis-à-vis unexplored territories.

There is now a very clear realisation that it is extremely difficult to become a genuine pan-India player in every geography and real estate segment. Moreover,developers today have woken up to the fact that there is only limited capital available to real estate players today capital that is earmarked for residential projects,construction funding against achieved leases and signed contracts,or for cities displaying sufficient demand even in subdued market conditions.

In the current context,it makes sense for developers to re-strategise and focus on their core geographies. For example,if a certain developer is extremely accomplished as a residential player in the south,having high credibility and sufficient brand recall in this region,such a company would ask itself how wise is it to experiment in the north or the west,and whether it would not make more sense to expand in the south.

Likewise,developers accomplished in IT projects would now concentrate on geographies that feature a healthy IT component,and avoid branching out into cities that lack a sufficient volume of such activity. Such developers would see the virtue of focusing on IT-centric cities such as Bangalore,Hyderabad,Chennai,Mumbai,Gurgaon and Pune,and re-think on plans to invest in cities that lack activity in this sector.

RISE OF LOCAL DEVELOPERS

Tier II and Tier III cities still represent a great story,especially in terms of affordable housing for industrial work-force. However,this story may no longer be suitable for some of the larger developers. These are locations where the strength of regional players will come into play.

There is at least one strong developer in every region. For instance,Panchshil Realty,Magarpatta,Paranjape Builders and Kumar Builders are very powerful local brands in Pune,with a company like Pharande Spaces practically spearheading the residential drive in Punes PCMC area. These brands have demonstrated that they understand their geographies better than outsiders who set up shop to cash on the Tier II/Tier III story.

In the next 1-2 years,developers would have realigned their business strategies sufficiently to leverage the potential of Tier II/Tier III cities that have sufficient market drivers or are witnessing considerable investor activity,such as Kochi,Surat,Mohali and Chandigarh.

THE LONG-TERM VIEW

When it comes to long-term property investment,there is definitely no reason to look only at the metros. In the coming decade,India will add 95 million people to its already dense urban fabric,nearly one-fourth of its current urban population.

India needs more cities,and the ones which are growing now will grow exponentially in times to come. The cities that should be watched in the long-term by investors are: Ahmedabad,Surat,Vadodara,Kochi,Coimbatore,Tiruvananthapuram,Jaipur,Jodhpur,Vishakapatnam,Vijaywada,Chandigarh and Ludhiana.

The author is CEO-Business,Jones Lang LaSalle India