Small towns in South beat North in Tier II realty markets

You knew that the real estate markets in the South were more resilient amongst tier I cities. Now, data and analytics firm PropEquity has found that even amongst the tier II cities, the region's property markets fare much better compared to their northern peers.

A report titled 'Top Tier II Cities', brought out by the real estate research firm on Wednesday, ranked Kochi at number one, followed by Nashik, and Vishakhapatnam. Vadodara came in at fourth place, Trivandrum at fifth, followed by Jaipur and Mangalore. Indore and Goa were ranked ninth and tenth.

Northern cities like Dehradun, Agra, Lucknow, Bhiwadi and Mohali were at the bottom of listing at thirteenth, sixteenth, seventeenth, eighteenth and nineteenth respectively.

Samir Jasuja, managing director and founder of PropEquity, said one of the main reasons for South cities emerging as top tier II property markets in the country was their focus on execution of projects for timely delivery.

"They (South cities) have concentrated on the execution. Also, the weighted average property prices are quite low even as supply is balanced with demand. Better employment generation and a more conservative approach by developers have also helped in keeping the market relatively healthier. Since tier II cities in South are end-user-driven, demand -supply situation is not crazy like it's been in the tier II cities in the North," he said.

According to him, the Northern tier II cites have performed miserably because they are dominated by investors and developers who have disturbed the demand-supply equilibrium by flooding the market with huge project sizes. Jasuja said project costs in the North are also much higher because builders had jacked up land priced as they tried to create huge land banks.

"In North, there is huge debt constraint because large developers have bought large land banks. You look at Jaipur, Lucknow or Mohali, there have been thousands and thousands of acres that have been accumulated while that kind of demand is just not there in those cities at the moment," he said.

The online property analytic firm has ranked the 19 tier II cities based on seven positive parameters like size of the market, increase in market size, possession/launch ratio of projects, absorption to supply ratio, compounded annual growth rate (CAGR) of absorption, absorption of new projects and rise in absorption prices. The negative indicators that it has considered for evaluating them are total unsold inventory to yearly absorption ratio, average delay in project execution and construction committed to construction completed.

Ashutosh Limaye, head - research, JLL India, said land cost was major factor in making Southern cities less vulnerable to demand downturn in the real estate market.

"Cost of land constitutes 30% of the total project cost in tier II cities in South compared to 60-70% of the project cost in North and so they have more flexibility and leeway to bring down the price when property demand slows," he said. However, he said, tier II markets were still smaller in size and yet to fully mature compared to tier I cities.

"The flipside is that besides being small, these market (tier II) are also not mature. Property buyers have the option of constructing their own houses. This could expose a developer to the risk of market not responding to a project in tier II," said Limaye.

He said PropEquity's finding that South tier II market were more stable has not come as a "surprise". "It is not a surprise. Tier II cities in the South have been demonstrating, for a long time, that they are more resilient as they driven by end-users, which helps the developer remain closer to the ground in terms gauging the market demand. The North market is largely driven by investors, and therefore, developers go wrong on pricing, sizes, specifications and other such matters, leading to a mismatch in demand and supply, he said.

Limaye does not see developers flocking the Southern tier II market because of its resilience. "I don't see large developers heading to tier II cities in a big way. They did that 7-8 years back, but are now largely concentrating on their own turf," he said.

JC Sharma, managing director, Sobha Developers, believes South had a natural advantage in terms of highest number of engineering colleges and English speaking population that helped in development of information technology (IT) sector – a catalyst in stabilisation of economy, currency, consumerism and others.

"We have seen this in Bangalore, Hyderabad and Chennai. It is reflected in smaller way in tier II cities too. We are there in Mysore, Coimbatore, Calicut, Kochi and many other tier II cities. We do not have particular policy for tier II markets, but if we are able to sell 10-12 apartments at about Rs 5,000 per square feet in a month in these markets, then it makes an attractive proposition for us," he said.