India’s economics l o w d o w n seems to have no major effect on the Indian warehousing industry r y. Dema and for warehousing space has picked up in the first half of 2019 on the back of growth of third-party logistics (3PL), engineering & manufacturing firms, and E-commerce segment that is leading to increased leasing by e-retailers.
According to the latest report titled ‘India Industrial and Logistics Market View H1 2019,’ presented by the property consultant CBRE, the demand for leasing of warehouse space went up by 31 percent to over 13 million sq ft across eight major cities in the first half of this year. The report says the demand for warehousing/logistics space was mainly driven by the third-party logistics firms, which absorbed 56 percent of the total space. Forecasting the future, the report claims that there will be 344 million sq ft of warehousing space in India by 2022, more than double the current capacity of 169 million sq ft, and triple the capacity that existed in 2015.
Global real estate consulting firm- Knight Frank’s recent report titled ‘India Warehousing Market 2019’ says that warehouse space leasing has witnessed a growth of 77 per cent year-on-year from April 2018 to March 2019 period.The report mentions that the manufacturing sector which accounts for 80 per cent of warehousing market is estimated to be at 68 million sq m (739 million sq ft) in 2019 and is expected to grow to 86 million sq m (922 million sq ft) by 2024. The report further states that demand of large sized warehousing in tier II cities is also on the rise and is showing a big growth potential. Kolkata witnessed highest year-on-year surge with 191 per cent in the warehousing leasing volume followed by Bengaluru and Hyderabad which witnessed growth of 147 per cent and 96 per cent respectively. While cities such as Coimbatore, Guwahati, Ludhiana, Nagpur and Lucknow are also gaining prominence in terms of the growing demand for warehousing space.
Growing warehouse space demand
An upsurge in logistics and warehouse leasing activities can be attributed to the government’s decision to accord infrastructure status to this sector due to which, the country is anticipated to witness increased leasing activities in the near future. “The logistics sector in India is witnessing an unprecedented structural shift in the form of automation, leading to blurring of lines with the retail sector, transformation of supply chains and growing investments,” says Jasmine Singh, Senior Director, National Head – Industrial & Logistics Services, CBRE South Asia.
“From an increasing number of policy incentives to tech-enhanced warehouses, the sector is now seeing a change in every aspect of operations. These factors are likely to create a favourable business environment and position India among the most attractive investment destinations for the logistics industry in the coming quarters,” believes Singh.
“Large-sized deal closures were mainly dominated by 3PL firms and E-commerce players. Auto-ancillary, FMCG, engineering & manufacturing and electronics firms also closed large-sized deals. Cities such as Delhi NCR, Mumbai, and Bangalore are expected to dominate the supply pipeline, with the average size of warehouses in Delhi NCR and Mumbai likely to exceed 1 million sq ft. Besides, cities such as Chennai, Hyderabad and Pune are also expected to witness supply addition, but the average size of development is expected to be in the 0.3 – 0.5 million sq ft category,” informs Singh.
Rapidly growing E-commerce sales is another key driver for the surge in the demand for efficient logistics space. Additionally, unavailability of adequate modern logistics facilities has further expanded the potential ahead to keep pace with this rising demand. It is anticipated that warehouse leasing will rise in the near future. This will largely be fueled by an anticipated rise in product sizes, continued demand from e-tailers, policy impetus to both sectors and higher demand from tier II cities. Advances in technology, particularly automation will enhance the specifications and operations of logistics assets, thereby pushing older, inferior grade properties down the demand pyramid.
A report titled ‘Online Retail Driving Realty – Elevating the E-commerce Game,’ examined the link between online retailing and the logistics sector and the impact of GST on leased warehouse spaces in India. It found out that the growth of the E-commerce sector has been on the back of favourable policy reforms, tech-enhanced warehouses, rising smart phone and internet penetration, and the digital India movement amongst others. The report states that this has up stretched the share of E-commerce in overall warehousing leasing uptake from 10 per cent in 2017 to 23 per cent in 2018.
Sandeep Chadha, Founder & CEO, Warehouster Capital observes that logistics and warehousing are inter-connected and that it is a packaged deal. Chadha says, “The implementation of Goods & Services Tax (GST) has triggered a consolidation drive and the incumbents are now looking for scale and efficiency. The notion of ‘One Nation, One Market’ has removed the pending bottlenecks. The logistics sector, which is currently $160 bn is expected to grow to $215 bn by 2020. The cumulative warehousing stock was around 169 million sq ft in 2018 and is set to grow to 260 million sq ft by 2020 with a growth rate of 24 per cent per annum.”
Prakrut Mehta, Director- Leasing, ESR India indicates, “The consumption of warehouse spaces is largely dominated by three sectors, E-commerce, 3PL, and auto and autoancillary. The increase in availability of warehouse spaces will benefit the burgeoning Ecommerce industry and the pressing need for industrial grade warehouses to service different parts of the country. A slew of thirdparty logistics companies could lead the way, absorbing millions of sq ft of space and letting it out to consumer goods, E-commerce, manufacturing and apparel companies.”
“Warehousing spaces are a crucial component of the supply chain for any enterprise that is dependent on the delivery of a product from one place to another,” notes Rajesh Jaggi, Managing Partner, Real Estate, Everstone Group. Citing CBRE’s latest report, Jaggi says, “The demand for warehousing spaces is increasing rapidly showcasing the potential of this sector. To meet this growing demand, significant investments are expected to be made, also the overall quality of warehouses has to be standardised which will in turn immensely benefit the sector and the overall economy.”
Meanwhile, Aditya Virwani, COO, Embassy Group emphasises on the year 2019 as a prospective year for India’s warehousing sector. Aligned with the demand and requirements, built-to-suit developments offered by Embassy constituted for 26 per cent of the absorption last year.
Virwani says, “Apart from simply being conventional storing services, today warehousing provides many value-added services. Warehousing and logistics players are increasingly partnering in adopting modern solutions to handle inventory management, usage of fleet management software and radio frequency identification (RFID) systems. A strategically placed and well-planned warehouse not only improves the consumer services but also facilitates competitive advantage through efficient supply chain economics. At this rate, the current warehousing space is expected to double by 2022.”
Agreeing to Virwani, Chadha says that Grade B and C structures are transforming into superior Grade A boxes which clearly suggests a strong demand and the trend is likely to continue over the next few years. The incumbents desire to be more competent and in the process are enhancing operations. This augurs well for the overall sectoral outlook. The continuous growth momentum is allowing the players to adapt technology and bring down the effective costs. This is resulting in warehousing being adapt with modern, globally compliant specifications. Therefore, this trend to be bigger in sizes, better in amenities and equipped with latest technology will steer and improve the growth rate of warehousing and its logistics thereof.
“As the demand is emanating from across the sectors, there is an enhanced and sustained growth in the medium to long term,” hopes Chadha.
Institutional investor’s interest in Indian warehousing market is growing manifold on the back of the government’s initiatives such as Make in India, implementation of the GST, and infrastructure status for the logistics sector. Post GST, there has been a spike in demand by almost 100 per cent as companies which were till now in a wait-and-watch mode switched to execution mode.
Global and domestic institutional investors have, over the past four years, invested over $3.4 billion into Indian warehousing. These accounted for around 26 per cent of the total private equity (PE) investments into real estate during this period, showed a Knight Frank India study. The rise in both institutional investor’s appetite for warehousing assets and the spike in leasing transactions are attributed to the industry’s rapid shift towards organised format led by the change in operating environment owing to policy decisions.
Definitely, Virwani says, sensing the tremendous growth potential of India’s warehousing sector, private players (both domestic and international) have ventured into the sector in the last few years. The trend will continue through 2019 with a view to bridge the gap between cost and efficiency of operations.
Virwani believes, “Facilitation of government regulations and organised reformations like implementation of GST, formulation of a logistics department under the ministry of commerce and other changes in the policies has provided further confidence in this segment. Growing manufacturing activity, rising domestic consumption, increasing international trade, advent of structured retail in the country, increasing private and foreign investments in infrastructure along with the E-commerce boom, will keep the sector development active for the next few years to come.”
Counting on the strong demand and increasing formalisation of the space attracting big investments, Singh says, “Although, a majority of the sector is unorganised, the entry of international players has resulted in the emergence of quality assets. While the overall supply (grade A and inferior grade) for the sector is expected to be around 60 million sq ft till 2020, at least 22 million sq ft of this supply is estimated to be in the grade A category and likely to be developed by leading players such as Indospace, Allcargo, Embassy and ESR.
Regarding ESR’s in-house strategies and investment plans, Mehta informs, “We have recently collaborated with Future Group to invest close to 300 crores to develop logistics infrastructure assets in Nagpur and Jhajjar to service the north and central regions. We have has also partnered with Lodha group to invest around $100 million to develop a state-of-the-art master planned Industrial park in Palava, servicing regions in and around Mumbai.”
Among Indospace’s major deals, Jaggi mentions, “World’s largest furniture retailer, IKEA has associated with us to build their first modern, built-to-suite, world-class distribution centre in India, located in IndoSpace Chakan Park. Similarly, various global organisations such as Nissan, DHL, DB Schenker, Steelcase, Bosch and Aptiv have partnered with us for their warehousing needs.”
With a stagnant residential sector, developers are now looking at warehousing sector to diversify, mitigate risks and increase the income. While micro and macro factors are suggesting strong demand, leading players in this sector are ready to play their part and contribute to the overall growth.
According to Chadha, warehouses these days are used not just for the storing but also as regional distribution centres, fulfilment centres, experiential zones,etc. And this multiple usability has made warehousing critical and has set in a motion an era of consolidation and efficiency.
Chadha says, “Major Indian business houses be it Embassy, Vatika, Hiranandani and global institutional players like Everstone, Warburg Pincus, Logos, GLP, ESR are all active in India’s warehousing realm, reaffirming its potential in delivering superior returns. Among the marquee investments in 2018, we saw Indospace committing $700 million in GLP, while Allianz committed in $1 billion in ESR. Macquire and Ivanhoe together invested $431 million in Logos and Assetz.”
The next phase
The year 2019 marks two years of implementation of the GST which pegged to transform India into a single integrated market,resulting in an increasing number of consolidation/expansion deals by both industrial and logistics occupiers – a trend that is expected to continue.
The sector is also likely to attract significant investments – as indicated by the latest report titled, CBRE APAC Investor Intention Survey, 2019. India was among the top five investment destinations in APAC; depicting industrial and logistics as one of the top segments expected to be targeted by investors in 2019. The incremental growth in the Indian logistics and warehousing sector is expected to drive more foreign participation, create job opportunities and boost real estate demand in the country.
Besides, tier II, tier III cities are expected to witness healthy demand from both technology and flexible workspace operators over the coming years. Robust supply outlook over the next three years suggests developers are capitalising on the buoyant demand. The increased demand would also pave way for opportunities such as asset enhancements and redevelopments. Many grade B warehouses located close to major cities will undergo redevelopments as per occupier specifications.
Jaggi says, “A shift from single warehouse to cargo hubs, fulfilling’s multi-client demands, warehousing sector has come a long way and has driven huge investments, both from domestic as well as global investors. We feel the future of this sector is very bright, and with the growth of our economy, the demand for quality warehousing is naturally expected to grow.” As supply chains need to have a larger scale and become more agile, infrastructure development will have to respond to this need by becoming more forward-looking. While government policies and shifting demand patterns will be instrumental in shaping future trends, increasing technological applications will redefine the sector’s status-quo.
According to Mehta, the future of warehousing will witness increase in sustainable green buildings, having a tech-enabled approach, ondemand plug and play spaces to reduce the time lag to move into a warehouse space.
As the sector evolves, structural changes in planning, construction and operations of warehouses in the coming years is likely to be witnessed. Chadha believes that the country will see a strong sustained demand in the medium to long term. The focus will be on new age Grade A warehouses that pave the way for efficiency and scale. Companies are using a hub and spoke model to enhance the throughput and overall efficiency. The consolidation is likely to continue with increased momentum to exploit the favourable policy regime.
“With government’s focus to build infrastructure with the amalgamation of cutting-edge technologies, warehousing in India is poised for growth unseen hitherto. As for the interest of institutional investors is concerned, we are already seeing an influx of large ticket size transactions, reaffirming the potential and viability of the sunrise sector,” says Chadha.
Indian warehouse sector provides employment to more than 22 million people. Lowering of logistics cost has significant bearing on the GDP of the country.
Virwani says, “With focus on new technology, improved investment, skills enhancement, removing bottlenecks, improving intermodal transportation, deploying automation, implementing single window system for faster clearances, and simplifying the entire processes, we will witness continued development in the segment.”
The number of start-ups aimed at bridging the technology gap is also on the rise. Software that enables improved fleet management though live tracking of goods, RFID system for inventory identification, automated pallet storage, amongst others are being increasingly used. As clients become more demanding and the scale of operations grow, the use of technology will only increase. Going forward, India’s logistics and warehousing segment will be a significant contributor to India’s GDP growth.