The Rise of Real Estate in India's Tier II and III Cities: A New Investment Frontier
Real estate investment activity is shifting toward India’s Tier II and III cities, supported by rising incomes, infrastructure expansion, and changing homebuyer preferences, according to Manoj Dhanotiya, Founder & CEO of Micro Mitti.
Dhanotiya said decentralised economic growth and demographic trends are playing a central role in driving housing demand beyond metros. Over 45% of India’s urban population growth over the next decade is expected to come from Tier II and Tier III cities. These locations are seeing a growing share of organised employment across manufacturing, IT services, logistics, healthcare, and education.
Government spending on highways, industrial corridors, airports, and urban infrastructure has strengthened local job ecosystems, directly translating into housing demand, he said.
Affordability continues to be a major advantage for homebuyers and investors alike. According to Dhanotiya, residential prices in Tier II cities remain about 40 to 60 percent lower than in major metros, while average home sizes are 20 to 30 percent larger. Connectivity improvements now go beyond highways to include regional airports, upgraded rail networks, urban transit systems, and digital infrastructure, reducing the economic trade-off of living outside metro cities.
From an investment perspective, Dhanotiya said smaller cities are being viewed as viable options for capital appreciation and portfolio diversification. While rental yields in Tier II and III cities tend to be moderate, lower entry prices improve risk-adjusted returns. In several well-performing non-metro micro markets, residential capital appreciation has averaged 8 to 12 percent annually in recent years, compared with lower single-digit growth in some saturated metro suburbs.
Buyer behaviour is also evolving. Dhanotiya said first-time homebuyers are largely end-use driven and risk-averse, prioritising delivery certainty, developer credibility, gated communities, and long-term affordability through stable EMIs. At the same time, investors are becoming more data-led, closely evaluating supply pipelines, absorption rates, rental demand, and exit liquidity. He noted the rise of hybrid buyers who purchase a first home for self-use with a long-term plan to retain it as an income or appreciation asset while upgrading later.
However, Dhanotiya cautioned that investors need to be selective when entering emerging cities. He flagged micro-market oversupply, title and approval risks, and uneven demand within cities as key challenges. “Only specific corridors tend to sustain long-term absorption,” he said, underscoring the importance of legal diligence, credible developers, and realistic execution timelines.
Looking ahead, Dhanotiya expects momentum in Tier II and III real estate to sustain over the next two to three years. He said cities and micro markets backed by real job creation, disciplined supply, and strong governance are likely to outperform, while speculative pockets may see consolidation. The next phase of growth, he added, will favour long-term, quality-focused investors over short-term speculation.
