Tier 1, Tier 2, and Tier 3 Cities in India: Key Differences in Property Prices and the Complete City List

The Indian real estate sector is undergoing many changes. The prices of properties, development of infrastructure, and the opportunity to invest in the industry are not the same in all cities. It is therefore necessary to understand the difference between Tier 1, Tier 2, and Tier 3 cities of India.

While Tier 1 cities like Mumbai, Delhi, Bangalore, and Hyderabad are known for their high property prices, well-built infrastructure, and job opportunities, Tier 2 and Tier 3 cities are being considered for their low property prices and growth potential.

In this article, we will focus on the distinctions between Tier 1, Tier 2, and Tier 3 cities in India, compare the prices of properties in these cities, and list all the cities that come under each tier. No matter if you are planning to buy a property for yourself, or for making an investment or entering into new real estate markets, this comparison will be beneficial for you.

What Are Tier 1, Tier 2 and Tier 3 Cities in India?

City tiers in India are used to determine how economically developed a city is. Originally introduced by the seventh pay commission to calculate house rent allowance (HRA) and split cities into X (Tier 1), Y (Tier 2) and Z (Tier 3) cities.

• Tier 1 Cities: Large metropolitan areas with a population greater than 4 million. They are the economic powerhouse of the country with corporate head offices, international airports, large transport networks and developed real estate.

• Tier 2 Cities: Fast developing cities with a population between 1 million and 4 million. They have large IT/ manufacturing sectors, developing infrastructure, increasing investment and competitive property prices.

• Tier 3 Cities: Developing towns and cities with populations between 200,000 and 1 million. These areas will have an agriculture based industry, local education centres and increasing consumer spending.

Full List of Tier 1 Cities in India

The following is a list of Tier 1 cities in India, which include eight major metropolises: Mumbai, New Delhi, Bengaluru, Hyderabad, Chennai, Kolkata, Pune, and Ahmedabad. All of these cities have economic significance and are well known for infrastructure, employment generation, and a good real estate market.

Complete List of Tier 2 Cities in India

The complete list of Tier 2 Cities in India includes cities witnessing high development for both residential and industrial purposes due to government initiative and decentralization by companies.

Complete List of Tier 3 Cities in India

This list of tier 3 cities in India includes upcoming regional centers that are witnessing real estate developments due to good road connectivity, cheap land availability and regional industries.

Differences between Tier 1, Tier 2 and Tier 3 Cities

In order to comprehend the difference between Tier 1, Tier 2 and Tier 3 cities of India, it is essential to compare these categories of cities on the basis of several criteria, which include population, infrastructure, employment opportunities, cost of living, property costs, connectivity, and real estate development.

Such criteria enable home buyers and investors to choose an appropriate city depending on their financial and lifestyle needs.The following is the comparative chart of Tier 1, Tier 2 and Tier 3 cities of India.

Population  : Tier 1 cities are highly populated with a population of more than 4 million. This has resulted in high rise buildings to accommodate the huge number of people living here. Tier 2 cities have high rise buildings with condos but also have master-planned developments. They cater to a growing population of between 1-4 million. Tier 3 cities have low density with single occupancy homes and low rise apartments.

Transportation : Tier 1 cities have well connected transport systems including, functional metro systems, signal free flyovers and international airports with multi terminal systems. Tier 2 cities are quickly becoming well connected due to various state initiatives such as the Smart Cities Mission. They have BRTS within the city, more regional airports and connections to national expressways. Tier 3 cities have regional transport systems using state highways and regional railways. Improvements are typically focused on widening roads.

Employment : Tier 1 cities are major employment centres and attract jobs in IT/ITeS, investment banking, management roles in multi-nationals, and niche industries. Tier 2 cities are becoming centres for employment in corporations. With many IT back offices, financial technologies centres, automotive manufacturing and startups wanting to save on costs. Tier 3 cities see employment opportunities in government roles, regional trade, food manufacturing, local manufacturing and education.

Living Costs : Overall living costs are very high with high costs of housing, private schooling, eating out and transport. A large chunk of your monthly income will go on housing in Tier 1 cities. Tier 2 cities are cheaper to live in with good social infrastructure. International schools, multi speciality hospitals and shopping centres can be found here. Tier 3 cities are cheap to live in with basic lifestyle facilities.

Property Prices in Tier 1 vs Tier 2 vs Tier 3 Cities

There are variations in the prices of property in Tier 1, Tier 2, and Tier 3 cities in India owing to variations in factors such as infrastructure, population, job opportunities, connectivity, and housing needs.

The reason why Tier 1 cities experience high property prices is because of the developed real estate market and the demand that exists for property, whereas the other two types of cities have comparatively affordable houses and commercial properties. Here is how property prices vary in India. Here is the comparison between property prices in Indian cities.

Average Property Rates

Tier 1 properties are priced at higher rates due to high land rates and strong branding by developers. The average selling price varies between ₹6500 per sq ft to above ₹25000 per sq ft.

Tier 2 cities offer an affordable range with prices varying from ₹3500 to ₹8500 per sq ft. This allows buyers from the middle income bracket to buy larger properties. Tier 3 cities offer prices from ₹2000 to ₹4500 per sq ft.

Land Rates & Plots

Plots are in short supply in Tier 1 cities, meaning plots are high in price. This means building your own property would be too expensive for an average salary earner.

Whereas Tier 2 & Tier 3 cities offer a good supply of plots approved by the authorities. This allows you to build your dream home at reasonable plot prices.

Rentals & Income Generation

Tier 1 cities will offer you higher monthly rental income (for example 3 BHK properties would earn between ₹35000 to ₹90000).

However, with the high property prices you will see low rental yields (2.5% to 3.8%). Tier 2 cities often offer much higher rental yields (3.5% to 5.2%). With low purchase prices and steady demand from tenants moving for corporate jobs.

Affordable Cities To Invest In

Tier 2 cities are an affordable option to invest in. You will generally only pay less than 30% of your average income on your property EMI.

Whereas Tier 1 cities often require two income earners to pay between 40% to 60% of their income on their mortgage.

Which Tier Offers Best Investment Opportunity?

The best tier to invest in depends on your investment goals, risk tolerance, how much you can hold and your capital.

Benefits Of Investing In Tier 1 Cities

• High liquidity : Tier 1 cities such as Gurugram, Noida, Mumbai and Bengaluru offer high value residential and commercial properties. These have an active secondary market.

• Leading Developers: Tier 1 national developers offer high quality properties built to international standards.

• High security: Due to a high amount of corporate jobs in these areas there is little chance of property value drops.

Benefits Of Investing In Tier 2 Cities

• Higher % capital growth – Tier 2 cities often offer increased capital growth due to new infrastructure development. New expressways, airport expansion and metro lines can all increase your property value quicker.

• Better cash flow – With lower property prices and increasing rental demand from expanding corporate areas you can receive better cash flow.

• Lower entry costs – You can invest in a number of Tier 2 cities to create a diverse portfolio for the price of one luxury property in a Tier 1 city.

Tier 3 Cities

• Long term capital growth: Purchasing land close to new industrial areas or state highway bypasses can provide long term capital growth for patient investors.

• Low entry cost : A great option for first time land investors looking to purchase land assets with little cost.

What Is Driving The Growth Of Real Estate?

There have been many developments witnessed in the real estate sector in India because of urbanisation, infrastructural development, an increase in income levels, and a rise in the demand for residential and commercial properties.

The development of government policies, better connectivity, increased employment, and business expansion have also led to development in the real estate sector. Although Tier 1 cities remain favourites for real estate investment, Tier 2 and Tier 3 cities are gaining popularity owing to low real estate prices and infrastructural development.

Some of the main factors that have caused growth in real estate in Tier 1, Tier 2, and Tier 3 cities in India include:

• Infrastructure development – Major national projects such as the DMIC (Delhi Mumbai Industrial Corridor), Bharatmala Pariyojana, expressways and regional rapid transit systems are linking Tier 2 & Tier 3 cities directly into Tier 1 areas.

• Corporate decentralisation – IT, SaaS and corporate back office companies are moving into Tier 2 cities such as Lucknow, Jaipur, Indore and Kochi. This is due to cheaper office rental prices.

• Flexible working – Professionals can move back to their Tier 2 & Tier 3 hometowns offering demand from end users for large 3 & 4 BHK properties.

• Regulation – With state RERA and DILRMP (Digital India Land Records Modernization Programme) in place there is greater clarity on property titles.

Conclusion: What city tier should I invest in?

The decision of whether to invest in a Tier 1, Tier 2 or Tier 3 city will depend on your personal situation. Tier 1 cities will preserve your capital, offer high liquidity in their secondary market and have a strong tenant base of companies. They are perfect for high net worth investors. Tier 2 cities will give you a great balance between low entry prices, high percentage growth and high cash flow yields. When investing in property, it is important to invest in properties with verified developers and RERA information to ensure your investment is safe and profitable.

When investing in property, it’s important to research the market objectively. Work with MoneyTree Realty – the most trusted real estate advisors in India – to ensure you’re buying RERA approved properties with verified information. Our experts will help you make the right decisions to ensure you get high yielding property investments.

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