Land vs Housing in Tier-2 and Tier-3 Cities: Experts weigh in on returns and risks

Land vs Housing in Tier-2 and Tier-3 Cities: There is an emergence of radical changes in the real estate scenario in India, as Tier II and Tier III cities are gaining importance with regard to infrastructure development, job creation, and government initiatives. Experts point out that although land and housing serve as potential investment instruments, the risks and returns involved can vary to a great extent depending upon the area, period, type, and, importantly, the inputs provided.

The discussion comes amid rising optimism in smaller cities due to the emergence of infrastructural developments like metros, expressways, airports, and industrial corridors. However, experts emphasised that this is not a uniform boom but a selective, infrastructure-linked market transformation.

Infrastructure-led growth driving Tier-2/3 real estate

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According to Square Yards' research insights, Tier-2 and Tier-3 cities could witness land price appreciation of 25 per cent to 100 per cent over the next 2–4 years, driven by infrastructure expansion and employment-linked housing demand.

However, it is important to note that this projection is based on launch price data of new projects, not actual registry (transaction) values, which may differ in real-world execution.

In a conversation with Zee Business, Sunita Mishra, Vice President–Research & Insights at Square Yards, highlighted that infrastructure projects can significantly transform real estate markets.

Using the case of Jewar Airport, Mishra stated that land prices have increased five times in the past five years since the announcement of the project in 2015. She further said that the more a project proceeds from the stage of announcement to implementation, the faster prices rise.

However, she also emphasised that execution is the key risk factor, and projections assume that government timelines are broadly met.

Land: High returns, but high speculative and fraud risks

Experts noted that land typically delivers the highest early-stage returns in infrastructure-led markets due to speculation and anticipation effects.

But according to Mishra, there were many risks associated with this particular market, which included:

• Speculation bubble
• Fraudulent transactions, as well as exploitation of first-time investors
• Inadequacy in regulations in some areas

Moreover, Mishra also warned that new entrants and investors driven by fear of missing out (FOMO) were highly susceptible to this kind of market.

Hence, even though the land segment offers a huge appreciation potential, it is also prone to high-level speculation, and investor protection is weakest.

Housing: More stable, but uneven market performance

On the other hand, housing demand in Tier-2 cities is increasingly driven by end-users rather than investors, marking a structural shift in market behaviour.

According to Pradeep Mishra, a property expert, “Earlier demand was investor-driven, but now it is increasingly end-user driven, especially in Tier-2 and Tier-3 cities.”

However, he clarified that the market is not uniformly strong across all segments.

• Premium housing demand remains strong in select locations
• Affordable housing is still under pressure due to rising land and construction costs
• Middle-income segments face affordability challenges

He also highlighted that rising land auction prices and input costs are pushing developers toward higher-ticket or luxury projects, reducing affordable supply.

Liquidity and exit challenges remain a key concern

A major structural challenge in smaller cities remains liquidity and exit timelines.

While Tier-2 cities are improving due to infrastructure growth and job creation, resale markets are still slower compared to metros.

Pradeep Mishra noted: “Liquidity is improving, but exits still take time, especially in non-prime locations.”

He added that:

• Prime, infrastructure-linked areas offer better liquidity
• Peripheral or speculative zones still carry high exit risk
• End-user participation is improving market depth over time

The entry of branded developers and organised projects is also gradually improving trust and resale potential.

Structural shift, not a uniform real estate boom

Experts agreed that India is witnessing a structural real estate shift rather than a broad-based boom.

Key drivers include:

• Large-scale government infrastructure spending
• Industrial corridors and regional economic development plans
• Job creation in emerging clusters

However, risks remain due to:

• Execution delays in infrastructure projects
• Affordability constraints in lower and mid-income segments
• Cyclical price spikes followed by stagnation in some micro-markets

Investor takeaway: Land vs Housing

Land

• High return potential in early infrastructure phases
• High volatility and speculation risk
• Greater exposure to fraud and illiquidity
• Strong dependence on the execution of infrastructure projects

Housing

• More stable, end-user-driven demand
• Better long-term sustainability in active job hubs
• Moderate returns compared to land
• Still constrained by affordability pressures

Experts suggest that Tier-2 and Tier-3 cities are emerging as important real estate growth areas, but outcomes are highly selective and not uniformly distributed across markets.

Success in these markets depends on:

• Infrastructure execution
• Location quality
• Regulatory clarity
• Liquidity conditions
• Informed investment decisions

Overall, the market reflects a structural realignment rather than a broad-based property boom, with both opportunities and risks varying significantly by micro-market.