India's tier II / tier III real estate story - Then and now
By Sanjay Dutt, CEO-Business, Jones Lang LaSalle
The demand fundamentals of the
In the South,
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, organizational 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 realizing 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-a-vis unexplored territories. There is now a very clear realization that it is extremely difficult to become a genuine Pan
In the current context, it makes sense for developers to re-strategize 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 it is 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
The Edge Of The Local Developer
Tier II and Tier III cities still represent a great story, especially in terms of affordable housing for industrial work-forces. 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. These brands have demonstrated that they understand their geographies better than any players who arrive from the outside to experiment on the Tier II / Tier III story.
The success of these local developers will inspire larger developers from beyond a region's borders after the fundamentals of that area's demand are captured sufficiently and the markets are sanitized in terms of municipal and financial market stabilization.
In the next one to two years, developers will have realigned their business strategies sufficiently to leverage the potential of Tier II / 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.