100 per cent FDI in e-commerce: New entrants may push demand for office space, warehousing

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April 03, 2016 10:16 AM

On Tuesday, the government clarified its policy on foreign direct investment (FDI) in e-commerce and online retail consumer businesses that operate as marketplaces.

As e-commerce players need to deliver products quickly to their customers, there is a sense that the most important clientele segments for them are in the tier-II and tier-III cities.(Image for representation only)As e-commerce players need to deliver products quickly to their customers, there is a sense that the most important clientele segments for them are in the tier-II and tier-III cities.(Image for representation only)

On Tuesday, the government clarified its policy on foreign direct investment (FDI) in e-commerce and online retail consumer businesses that operate as marketplaces. While it allowed 100 per cent FDI through automatic route, it also expanded the scope of marketplace to include support services (to sellers) like warehousing, logistics, order fulfillment, call centre, payment collection and other services. If the e-commerce industry is set to be a direct beneficiary of the same, real estate experts see it as an opportunity for the sector and say that the permission for 100 per cent FDI in marketplace e-retailing will lead to a pick-up in demand for office space, warehousing and logistic spaces as there will be new entrants in the market.

“India is already host to some of the largest global e-commerce players. The announcement that 100 per cent FDI will now be allowed in e-commerce is going to open the floodgates to a host of other players in this segment,” JLL India chairman and country head Anuj Puri said in a report.

He pointed that the new players would require large office spaces to house their back-end teams and this demand would be naturally directed to the seven major cities.

Samantak Das, chief economist at Knight Frank also said that government’s decision on FDI will first lead to a rise in the demand for office space. “Entrepreneurs and companies looking to enter the marketplace segment will first look for office space in major cities and so there will be a pick-up in demand for office space in the near future and will continue to grow,” said Das. He added that since the share of e-tailing out of the total retail business is expected to grow from 2 per cent to 11 per cent by 2019, it will lead to a derived demand for other related services.

Puri pointed that even the logistics and warehousing demand will rise and that will spread across the country. “The second impact will be on the demand for warehousing and logistics real estate. Unlike the demand for office spaces, this additional requirement will be spread fairly evenly across Indian cities,” Puri said.

As e-commerce players need to deliver products quickly to their customers, there is a sense that the most important clientele segments for them are in the tier-II and tier-III cities.

“We will therefore see a significant step-up in demand for warehousing spaces in and around these cities,” Puri added. Indian real estate sector, particularly housing segment, is facing a huge slowdown from last 2-3 years. However, office and warehousing segments have been performing better due to demand of spaces from corporates especially e-commerce firms.

Das, however, pointed that the real estate demand for warehousing space will take some time to pick up. “Currently, the major criteria for setting up warehouse is tax efficiency as the companies look to save on inter-state tax. However, after the introduction of GST and inter-state tax irritant going away, there will be a real pick-up in demand for warehousing space,” said Das. He also pointed that the real take-off will be in the tier-II and tier-III cities as both warehousing and logistic network will spread going forward.

If the FDI permission is a positive, the government’s decision to put a cap on the percentage of sale done by a single vendor or a group company and their ability to influence discount on price of goods and services has dampened the sentiments of marketplace players. This may however see the brick and mortar players becoming more competitive and they may go an on expansionary mode.

“E-commerce players now will be unable to sell below market prices and not more than 25 per cent of sales will happen via one vendor…this announcement brings brick-and- mortal retailers on a more level playing field, and would help to still the outcry over unfair trade practices to an extent,” Puri said.

“Overall, this is positive for the retail industry; more rational behaviour will now prevail in terms of market trade practices, and mounting of losses by most e-commerce companies will be curtailed. Online sales may reduce as deep discounts disappear, although losses will also be capped,” Puri added.

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