Indian retailers to explore emerging untapped markets in the tier II cities

V Nagarajan

While tier I cities in India have long been at the forefront of the country’s economic and real estate growth trajectory, the needle has been moving towards the relatively under penetrated tier II cities. These relatively smaller markets have fast emerged as catalysts for economic growth and employment, leading to a rise in their disposable incomes. What has followed is a change in the consumption patterns, resulting in the change of retail dynamics of these cities, according to property consultant CBRE survey.

A striking example of evolving consumption patterns in these cities is the fact that about 50 per cent of online urban shoppers in India were residing in these tier-II / III cities in 2021; a percentage that is projected to reach nearly 60 per cent by 2030.These e-commerce dynamics point towards the presence of a high aspiration consumer base, thereby propelling the influx of quality retail supply. This supply influx is also matched by the entry and expansion of several international and domestic retailers across high streets and malls in these locations.

What is also important to note is that these consumption patterns are not inconsistent growth spurts, but point towards sustainable, long-term demand.

Most of these non-metro cities are established trade and business hubs and are also witnessing healthy traction in commercial office space take-up; which also supports growth in their retail real estate ecosystem.

In fact, retail supply has also matured, moving away from vanilla stores on high streets to the entry of investment-grade developers who are setting up quality retail spaces, which serve as both entertainment and shopping destinations. The combination of these various factors provides for a thriving environment for retail real estate to take shape and mature.

The retail real estate market in tier-II cities exhibits a diverse landscape. As of 9M 2023, the total retail stock in the leading tier-II cities stood at approximately 29 million sqft. Among these cities, Jaipur, Lucknow and Chandigarh each boast of retail stock ranging between 3 to 7 million sqft. During the review period, supply addition picked up pace in cities such as Chandigarh, Jaipur, Goa, Kochi and Lucknow. Likewise, leading activity was primarily driven by these cities, along with other prominent markets such as Indore and Coimbatore.

According to a recent report by Cyber Media Research, tier II cities such as Guwahati, Coimbatore and Lucknow are leading in terms of time spent on online shopping. Furthermore, the e-commerce market share of tier-II cities in India has also grown from 19.4 per cent in 2021 to 21.4 per cent in 2022.

The surge in online shopping during the pandemic led stakeholders to move operations closer to the end-user markets and invest in automation to improve supply chain resilience.

The combination of improved internet connectivity, improved supply chain capabilities, and growing consumer awareness has contributed to the increasing e-commerce penetration in tier II cities. This trend is expected to continue as more consumers embrace the convenience and benefits offered by online shopping.

A rising urban population, increasing per capita income, supply chain revamp after the pandemic and successful brand launches in their tier II markets have led retailers and prominent developers to explore these emerging untapped markets.

I intend investing in immovable property in India mainly to earn return on investment. Is it advisable to opt for joint investment or go alone while registering property? Please clarify. Santhosh Rane, Sharjah.

From the point of view of tax planning, it would be advisable to buy one property in the name of each member of the family so that every member enjoys tax benefits. Even from the point of wealth tax planning one property is completely exempt from wealth tax. Joint investments can be made and from the point of tax planning, the big advantage is that every member enjoys deduction in terms of payment of interest on loan and repayment of loan.

I sold a commercial property and reinvesting in residential property to seek tax exemption from capital gains. While investing in a new property in joint names, my wife did not contribute for the investment. Will capital gains exemption be available still? Amit Kak, Dubai.

You will still be exempted from capital gains tax. The courts have held that where consequent to transfer of the capital assets the investment of net consideration is required to be invested in terms of section 54F for purchase or construction of residential house, and in case such house property is purchased in joint names, the assessed will be entitled to exemption. This is so even if the assessee’s wife had contributed money for the purchase and the investment made just in joint names.