After metros and tier 1&2 cities, it is now the turn of tier 3 housing markets, which are luring banks and housing finance companies (HFCs) to tap the booming residential real estate segment. The demand for housing in tier 3 cities and towns is driven by a hybrid working model, easy access to products through e-retailers, improving social infrastructure, and affordability.
At a time when the home loan markets in tier 1 and tier 2 cities are becoming crowded, this has triggered lenders to increase their focus on these expanding urban centres.
After observing a strong demand for housing in these cities, the public sector Bank of Baroda has deployed sales teams in tier 3 locations. “We have seen about 18% growth last year (FY23). Owing to the same we have deployed sales teams in these cities and hope to see more growth in the current year onwards,” said Harshadkumar T Solanki, head – mortgages & other retail assets, Bank of Baroda.
Real estate experts point out that tier 3 and tier 4 cities, towns, and rural areas account for more than 60% of the country’s housing market. Due to lenders’ dominance in Tier 1 and Tier 2 cities, it has a tremendous amount of untapped potential and is still largely unexplored. Housing plots and self-construction with ticket sizes ranging from Rs 12 lakh to Rs 50 lakh make up most of the portfolio in Tier 3 markets.
Sundaram Home Finance (SHF) is expanding operations in tier 3 cities and launching 15 new branches primarily in these (tier 3) markets this year. The home financier with sizable operations in the southern states has about 35% of its disbursements from tier 1 cities, while tier 3 cities and towns account for 10% of the total disbursements. This share from the tier 3 cities and towns is expected to increase 25% in the next three years. During FY23, SHF reported a total disbursement of Rs 3,978 crore.
According to Mumbai-based Vastu Housing Finance, the demand for housing loans in tier 3 and tier 4 markets is still high due to rising affordability and the rising number of nuclear families. The company disbursed more than Rs 1,800 crore in housing loans in FY23, with tier 3 cities and towns receiving 55% of those loans.
Sandeep Menon – founder, managing director & CEO, Vastu Housing Finance, said, “Growth in incremental disbursals is faster in the tier 3 markets against tier 2, driven by the increasing presence of formal lenders in the tier 3 markets.”
Girish Kousgi, MD & CEO, PNB Housing Finance, said, “We are focusing on strengthening our distribution network by increasing our presence in tier 2 and 3 cities.”
Developers’ body, Credai national secretary G Ram Reddy, claimed that interest in tier 3 housing markets has shifted as a result of the hybrid working model, access to commodities on par with metros and tier I cities, and rising real estate prices in tier I and II cities.
“Moreover, decentralisation in some states in the form of carving out new districts has resulted in creation of social infrastructure such as hospitals and educational institutions centered around the tier 3 cities, which are the district headquarters. These localities are emerging as new growth centres of housing, as well,” he added.