Why have housing sales fallen in 30 Tier-II cities?

Housing sales in India’s 30 major tier-II cities dropped by 13% during the July-September 2024 period, according to a report by PropEquity, a data analytics firm. The report shows that sales fell from 47,985 units last year to 41,871 units this year, while new housing launches dropped by 34%, from 43,748 to 28,980 units. This dip raises questions about the performance of smaller cities in the country’s real estate market.

Key reasons for decline

The decline in sales and new launches can be attributed to the high sales figures seen in 2023, creating a “higher base effect,” as Samir Jasuja, CEO and Founder of PropEquity, explains.

“The decline in sales and launches is on account of higher base effect as the year 2023 had recorded historic highs.” Jasuja pointed out that while tier-II cities benefit from lower costs of living, skilled labor, and strong infrastructure, they still lag far behind the country’s top 10 cities in terms of housing demand.

Indeed, the report shows that these 30 tier-II cities contribute just one-third of the sales and new launches seen in the top-tier cities, indicating a significant gap in market performance.

Which cities are selling?

Interestingly, the report highlights that the west zone, which includes cities like Ahmedabad, Surat, Goa, Nashik, and Nagpur, accounted for 72% of the total sales in the third quarter of 2024. This suggests that despite the overall decline, western India’s tier-II cities are performing relatively better in terms of housing demand.

Experts believe that the overall real estate market remains resilient, despite the drop in tier-II cities. Shashank Vashishtha, Managing Director of Exp Realty India, remarked, "These adjustments reflect a natural recalibration, offering homebuyers an opportunity as developers emphasise sustainable growth and affordability."

Vashishtha is optimistic that the upcoming festive season could see a rebound in housing sales, as many buyers tend to finalise their purchases during this period.

Risks for investors

However, not everyone shares the same positive outlook. Rochak Bakshi, Founder and CEO of True North Financial Services, warned that investing in real estate in tier-II cities comes with its own risks.

“Real estate investment has historically not been very lucrative in tier II cities,” Bakshi explained. He highlighted that despite improved connectivity and infrastructure, returns on investment in these cities remain relatively low due to poor rental yields, slow property value appreciation, and the illiquid nature of real estate. These factors, he argued, make investing in smaller cities more risky compared to larger urban centres.

While the current slowdown reflects both market adjustments and specific challenges in tier-II cities, the outlook for the real estate market remains mixed. Some experts are hopeful for a recovery, particularly as developers focus on more affordable housing options, while others advise caution for investors looking at tier-II cities.

As the festive season approaches, all eyes will be on whether these cities can bounce back or if the gap between tier-I and tier-II markets will continue to widen.

(With inputs from agencies)