The Tier II and III real estate story

The demand fundamentals of the India story are now focused on all the cities that have sufficient economic activity, be it industrial, service sector-driven or incentive-driven schemes by the state governments. In Gujarat, which has seen considerable industrial progress, key cities of Ahmedabad, Surat and Vadodara come readily to mind. Baddi in Himachal Pradesh, and Pantnagar and Rudrapur in Uttaranchal attracted a lot of residential developers, who met with success thanks to proactive government policies. In the south, Visakhapatnam, Coimbatore and Kochi emerged, thanks either to a large investor segment or as the outcome of economic activity. In the west, Pune, Nashik and Nagpur are noteworthy in this context. In all the cases, developers positioned their projects close to industrial hubs, targeting a totally different price segment and making the most of it.

What went wrong: While every developer was inspired to create a national footprint three to four years ago, most did not factor in state government-level regulatory challenges such as local municipal laws. They also did not consider that they may not have the requisite financial resources, organisational depth and knowledge of the local markets to execute projects in tier II and III cities. Nor did they gauge the demand fundamentals of these locations accurately. Such developers went for land acquisition with their own equity and were caught on the wrong foot as they did not realise that the property cycles were at their peak and that there was bound to be a correction, if not a fall. The dawn of reason: Major players are going to realign their positions vis-à-vis unexplored territories. There is a clear realisation that it is difficult to become a genuine pan-India player in every geography and real estate segment. Hence, it makes sense for developers to re-strategise and focus on their core geographies. For example, if a developer enjoys high credibility and brand recall in the south, would it not make more sense for the company to focus on expanding in the region?

Rise of the local developer: Tier II and III cities still represent a great story, especially in terms of affordable housing for industrial workforces. 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 and Kumar Builders are powerful local brands in Pune. These developers have demonstrated that they understand their geographies the best. Their success will inspire bigger developers from outside the region after the fundamentals of that area’s demand are captured sufficiently and the markets are sanitised in terms of municipal and financial market stabilisation.

In the next one or two years, developers will have realigned their strategies sufficiently to leverage the potential of these cities.

Sanjay Dutt is CEO, Business, Jones Lang LaSalle Meghraj