After the global financial crisis in 2007 – 08, we have hardly seen any investments by institutional investors into TIER II and TIER III cities of India. There were largely two reasons for this:
1) Lack of adequate governance and
2) Lack of demand.
However, as per our recent interactions, various institutions expect the first concern to by addressed thanks to RERA implementation.
The gap between the governance level of Grade A developers of TIER I and TIER II cities should come down drastically, making it a level playing field for all cities. This will leave us with the point 2 which is lack of demand.
While office demand will continue to remain largely with TIER I cities, considering the availability of talent pool and facilities, residential space should come under investor attention, especially affordable housing.
The luxury residential demand will take time before rising again, but demand for affordable housing at right price is sufficient.
With the government also supporting affordable housing with various incentives, developers can increase revenue and profitability faster than ever before, if they focus on creating the ideal combination of offering and expectations.
As per our rough estimate, the residential market size in India for 43 Indian cities with more than 1 million population, apart from top 7 cities, is as high as INR 30,000 crore, which constitutes 40% of the residential market of the country, by value.
While individually, the market size is limited, as an aggregate, these provide a huge opportunity for investors and lenders as well.
This, along with the government’s focus on making real estate industry more transparent, and providing enhanced support for affordable housing, should bring more investment, as well, to these cities, subject to the developers improving their track record to fit into the foreign investors’ criteria.
Shobhit Agarwal is MD & CEO – ANAROCK Capital.