Developers Tapping Warehousing Demand
Warehousing is one of the biggest growth areas in real estate today as demand from manufacturing and e-commerce firms is increasing. Not surprisingly, due to the slump in the residential segment, warehousing is attracting many large developers.
Text: Leandra Monterio
The warehousing industry in India was previously largely unorganized. However, with all the policy reforms, one being GST, this sector has undergone a paradigm shift. The once ignored warehousing sector has now captured the attention of some of the biggest players in the real estate industry like Brigade Group, Hiranandani Group, Lodha Developers and Prestige Enterprises.
Rajesh Jaggi, Managing Partner-Real Estate, Everstone Group elaborated, “One of the key challenges faced by the sector was multiple taxes, but with the introduction of GST in 2017, the government created a single national market with uniform taxes and removal of interstate checkpoints. This was a sea change for the warehousing industry. Another landmark move was granting infrastructure status to the logistics and warehousing sector. With this, the cost of funding will fall and players will have multiple options to raise money.”
Growth Inducing Factors
- The policy of having one tax for the entire country has boosted the confidence of investors. The biggest advantage of GST has been the reduction in inventory.
- The savings generated due to reduction in overall inventory levels is expected to surpass savings in real estate costs, as a result of consolidation of warehouses which is helping bridge the gap in this sector.
- Government led initiatives such as the ‘Make in India’ movement has facilitated the production level of the domestic market.
- The infrastructure status granted to the logistics sector including multi-modal logistics parks and cold chains has given access to multiple instruments through which warehousing players can raise money.
- Also, with the economic growth the demand for hi-tech warehouses located in strategic areas that are well connected to urban hubs, railway stations, airports and highways, has increased.
- As the e-commerce market in India steadily grows warehouses too are evolving to keep up with the high demanding online customer. As per the Economic Survey 2018, India’s e-commerce market has reached $33 billion, growing 19.1% in 2016-2017. To meet the demands of the ever-increasing e-commerce consumer’s warehouses are incorporating technological changes by adopting automation and robotics. The transformation and thriving of this industry has attracted ample Indian as well as foreign investments. As per industry veterans, the warehousing business is expected to grow 9 to 11 percent annually.
Balbirsingh Khalsa, National Director – Industrial, Knight Frank India added, “A plethora of factors are driving this wave of change in the warehousing sector. Companies around the world are turning towards technology to improve operational efficiencies in their warehouses and distribution centers. Investors are now preferring to invest in rent-yielding commercial assets rather than receiving poor returns by investing in the Indian residential market.”
Investments & Challenges
The warehousing industry in India is forecasted to grow at CAGR 13 per cent to Rs 9.2 trillion (Rs 9.2 lakh crore) by 2019-20, from Rs 6.4 trillion in 2016-17. Therefore, it is estimated that Grade A and B warehousing stock will grow at a CAGR of 21 per cent year-on-year taking the total tally of warehouse space in India to 297 million sqft by the end of 2021, which is double the warehousing stock of 139.8 million square feet in 2017.
Also, the government’s initiatives to streamline India’s logistics ecosystem, particularly custom clearances and overall infrastructure has resulted in India ranking 35 out of 160 countries on the 2016 World Bank’s Logistics Performance Index. This has brought India’s warehouse sector at par with global standards. With the continuous demand for high-quality warehousing and logistics facilities there is ample of ground still to be covered.
Anshul Singhal, CEO Embassy Industrial Parks Stated, “All the policy change and other government initiatives are resulting in betterment of the sector and making it investment friendly. The progress is visible but we now need to work towards proper execution of the proposed policies and implementation for a bright future.”
In light of the prolonged slump in the residential sector, big real estate developers now prefer to invest in the high yielding commercial market. The cap rates of the commercial sector are declining and inching below 8% from the 9–10% range. The risk-reward ratio would start becoming unfavorable as the cap rates start to decline further below 7–7.5%. As a result, this has triggered a shift in investors’ focus towards the warehousing sector where assets are offering a higher cap rate of around 150–200 bps greater as compared to commercial assets. This has led to a paradigm shift in the industry structure making the warehousing market one of the most favorable destinations for real estate players.
However, modern warehouses come with their own set of challenges. This business involves large scale acquiring of land which in turn requires huge amounts of capital. Developers entering into the warehousing sector are also faced with competition from the unorganized sector, who maintain smaller cluttered storage spaces near consumption centers.
Though the need for efficient warehousing designs and the advent of e-commerce and other multinational businesses that prefer to occupy only complaint facilities has substantially lowered the challenges faced by developers investing huge sums of money in the warehousing market. The main challenges the companies still face are inventory accuracy, inventory locations, infrastructure issues, redundant process and picking optimization.
Technology Driven Warehousing
Gone are the days of warehouses with leaky roofs and rising temperatures. Now companies at looking at acquiring warehouses equipped with the latest technology and constructed using materials of a high quality. In addition warehouse developers are also providing completely customized projects. Be it refrigerator rooms or automated warehouses, companies are ready to customize according to the clients specifications.
IndoSpace Industrial Park Oragadam II
In a smart warehouse, all gadgets and devices are fitted with sensors and are connected to each other via the Internet. Internet of Things, Cloud Computing, Big Data Analytics, Robotics and Automation together enable the concept of a Smart Warehouse. Amazon is a good example of a pioneer in this type of warehousing. Their warehouses across the globe are known to be updated with the latest technology and smart devices, thus setting a benchmark for the entire sector. Likewise, IndoSpace, the warehousing partner for IKEA in India, is building a 3 lakh sqft modern, built-to-suit, world-class distribution center at IndoSpace Chakan, Pune. Although, advanced automated warehouses in India are still in nascent stage, they are rapidly evolving.