With the introduction of the Goods and Services Tax (GST) round the corner and Real Estate Investment Trusts (REITs) likely to be a reality soon, the warehousing sector is looking at bright days ahead. The total warehousing space requirement in the country’s top seven markets — Mumbai, NCR, Bengaluru, Chennai, Pune, Hyderabad and Ahmedabad — is expected to grow from 621 mn sq ft in 2016 to 839 mn sq ft by 2020, Knight Frank India has estimated. At present, 17 mn sq ft of space is transacted annually in these seven warehousing markets, with the auto & auto ancillary and chemical & pharmaceutical sectors being the largest demand drivers.
Balbirsingh Khalsa, national director (industrial), Knight Frank India says, “The demand for warehousing is on the rise in the manufacturing and consumption sectors. Because of GST, there will be consolidation in the industry”. The new tax is also expected to help organise the market better. Ramesh Nair, CEO and country head, JLL India says, “While the existing cities are expected to retain their leading positions after GST’s rollout, India will witness the emergence of at least 12 new feeder/warehousing spoke locations”.
The stock of Grade-A and Grade-B warehouses — the distinction is made on the basis of construction quality, location, amenities, clients, etc. — is expected to grow faster in the next few years. According to JLL India, the total stock of Grade-A and Grade-B warehouses rose 16% to 111.9 mn sq ft in 2016 from 96.8 mn sq ft in 2015 — Grade-A stock rose 27% compared to the more modest 11% increase in Grade-B stock. “This not only shows a growing stock of organised warehouses in the country but also a growing preference for Grade-A warehousing space,” Nair says.
Except for Pune and Chennai, all cities have a larger Grade-B than Grade-A warehousing stock, says the JLL report. Nair observes that the difference between Grade-A and Grade-B stocks is glaring in Delhi-NCR and Mumbai. “In terms of the highest Grade-A and Grade-B warehouse rentals, Pune and Chennai lead the way due to their proximity to manufacturing hubs,” he says.
As for demand drivers, retail e-commerce is expected to more than double its warehousing requirement to 29 mn sq ft in 2020 from 14 mn sq ft in 2016. Another major area of opportunity is the agricultural produce and agri-commodities segment. According to industry estimates, lack of adequate cold storage facilities sees almost 25% of India’s agricultural produce being wasted. In fact, the losses are estimated to be in the range of
30-40% for many agri-commodities.
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Given the change that’s afoot, the sector has evoked interest from international institutions and investors, says Samantak Das, national director (research), Knight Frank India. In October 2015, global private equity firm Warburg Pincus and real estate developer Embassy Group formed a $250-million joint venture to set up industrial and logistics parks across the country. Recent reports (unconfirmed) suggest the Canada Pension Plan Investment Board may be close to buying Indo-Space, one of India’s prominent warehousing companies. “Investment in warehousing can ensure returns in the range of 10%-24% per annum,” Das points out.
If there is a hurdle in the way of the sector’s growth, it is in the acquisition of feasible land parcels. Land cost constitutes the largest component of a warehousing project investment. And while the rental values are primarily driven by demand and supply conditions, the land price depends on multiple factors. “Even though an investor can avail returns of up to 24% per annum in markets such as the Wagholi-Ranjangaon belt in Pune, in certain markets like the Jeedimetla-Medchal warehousing cluster in Hyderabad, even achieving returns upwards of 12% per annum is not feasible,” says Das.