Tier-II cities become real estate developers' next address for growth

Residential developers are expanding into India's Tier-2 cities as infrastructure upgrades, affordability and rising housing demand create new growth opportunities

Residential developers are increasingly expanding into India’s Tier-II cities as they see improving infrastructure, industrial growth, and changing homebuyer preferences creating new growth opportunities beyond the country’s metropolitan markets.

Industry executives say relatively lower market saturation, the availability of larger land parcels, and sustained end-user demand are making these cities an attractive destination for investment, even as rising land and construction costs pose challenges to project economics. “The expansion of developers into Tier-II cities is being driven by a powerful combination of infrastructure, affordability, and changing consumer aspirations,” said 

Abhinandan Lodha, chairperson, House of Abhinandan Lodha. 

He said investments in expressways, airports, Metro rail, industrial corridors, and digital connectivity have transformed many Tier-II cities into attractive destinations for homebuyers while creating jobs, with lower land costs enabling developers to launch larger, better-planned communities at competitive prices. 

According to Crisil Intelligence, residential demand across 10 major Tier-II cities grew at a compound annual growth rate of 14 per cent between 2020-21 and 2025-26 (FY26), with Nagpur, Coimbatore, and Lucknow registering demand growth of around 20 per cent. 

According to Manoj Dhanotiya, founder and chief executive officer of MicroMitti, an Indore-based proptech platform specialising in fractional real estate co-investment, some national developers have started entering these markets purely on cost arbitrage, as property in Tier-II cities still costs 40 to 60 per cent less than equivalent homes in metropolitan cities. 

According to Anuj Puri, chairman, Anarock Group, lower land costs and entry prices help developers protect margins in Tier-II markets. Developers can often achieve higher gross margins by focusing on premium and mid-segment housing while managing execution risk. 

“Tier-II cities are no longer viewed as secondary markets. They have emerged as strong growth centres, supported by improving infrastructure, better connectivity, industrial expansion, and a growing base of aspirational homebuyers,” said Parveen Jain, president, National Real Estate Development Council. “As economic activity spreads beyond the metros, these cities are seeing higher demand for quality housing and commercial developments,” he said. 

Jain expects Lucknow, Indore, Jaipur, Coimbatore, Bhubaneswar, Nagpur, Surat, and Chandigarh to remain among the key growth markets over the next two to three years, adding that developers are increasingly looking at these locations because they offer long-term demand, relatively lower market saturation, and big opportunities for planned urban development.

Developers are also increasing their land acquisitions in these markets. According to Anarock, Amritsar saw two land deals covering 520 acres by listed developers in FY26. Listed players also concluded land transactions in Vadodara, Nagpur, Panipat, Mysuru, Raipur, and Coimbatore during the year.

 

Amit Goenka, chairman and managing director (MD) of Nisus Finance, said, “The Tier-II residential story is no longer merely about affordability; it is increasingly about economic transformation.”

 

He said Tier-II cities provide developers with opportunities to acquire larger land parcels, build integrated communities, and address rising end-user demand at more accessible price points. Branded developers also enjoy pricing premiums over local players because of stronger execution capabilities and customer trust, he added. 

The demand profile is also changing as buyers increasingly seek larger homes and better amenities. According to Crisil, 2BHK and 3BHK apartments accounted for more than 75 per cent of total supply over the past five financial years, while the average size of 3BHK-and-above units has increased, indicating a preference for spacious living. Average ticket sizes have crossed ₹1 crore in Bhubaneswar, Indore, and Lucknow. Indore, Lucknow, and Surat have more than 20 per cent of active supply priced above ₹2 crore, while Jaipur, Nagpur, Nashik, and Vadodara continue to be led by the mid-segment market, with more than 75 per cent of supply priced below ₹75 lakh. 

“The homebuyer in Tier-II cities has become far more informed and aspirational than before,” Jain said. While end-users continue to drive demand, he said professionals returning to their hometowns, non-resident Indians, and buyers upgrading to larger homes with modern amenities are becoming increasingly important customer segments. However, developers say rising input costs continue to weigh on project viability. 

Execution also remains a challenge in several markets. Industry stakeholders say delays in approvals, infrastructure readiness around project locations, access to timely project financing, the availability of skilled labour, and rising construction costs continue to affect developers. 

Market watchers say construction costs have risen by 35-40 per cent over the past five years, while land prices in many Tier-II cities have also increased, squeezing sub-₹1 crore projects. 

“Developers are responding by moving to higher price points, scaling back amenities or unit sizes, and focusing on better micro-markets to justify pricing,” Puri said. In some cases, they are absorbing part of the cost increase to maintain launch pricing while protecting margins. 

“This has put pressure on project economics and, in some cases, extended execution timelines because of supply chain and manpower-related challenges,” said Rajnikant Mishra, founder and chairman of Lucknow-based Amrawati Group.

He added that developers are bridging this gap through better project planning, value engineering, technology-led construction practices, and efficient procurement while ensuring that quality is not compromised. 

“Though high prices for land and materials have forced certain price adjustments, demand remains strong as the decision to buy is based on lifestyle considerations rather than market speculation,” said Khalid Masood, MD of Lucknow-based Shalimar Corp. 

Mishra added that buyers are willing to pay a reasonable premium for superior quality, transparency, and a better living experience, provided the value proposition is clear and credible. 

Crisil added that while Tier-II cities are increasingly being driven by infrastructure-led growth and expanding services-sector employment, affordability, the absorption of higher-priced inventory, and funding constraints for smaller developers will remain key factors to watch in the coming years.