How Indian Warehousing Industry is paving Its Way To Be Next Big Thing?

A warehouse is a fundamental part of business infrastructure and is one of the key enablers in the global supply chain
How Indian Warehousing Industry is paving Its Way To Be Next Big Thing?

Logistics and warehousing plays an indispensable role in the transportation of goods across the country. A warehouse is a fundamental part of business infrastructure and is one of the key enablers in the global supply chain. It is the fulcrum for procurement, manufacturing and distribution services which collectively build robust economies.

The warehousing industry in India is largely unorganised and there are very few opportunities to buy assets from the organised segment, as such players are few in number. However, compared to other real estate assets, warehousing assets can be built in a relatively shorter time span. Hence, the risks in greenfield investments are lower. With infrastructure status, the approval and funding risk for greenfield investments have reduced further. Earlier, due to the unorganised nature of the industry the equity IRR for a development project was low. Now with all the policy reforms that are being undertaken there is a paradigm shift in the industry structure where it is becoming favourable for organised players. On account of this structural transformation, the attractiveness of taking up a warehouse development project is evident.

As per the Knight Frank report, reflected in the Equity IRR of a warehouse development project, indicates how warehousing as an asset class is becoming lucrative avenue in the spectrum of commercial real estate development. Limited warehouse supply from the organised segment, amidst the increasing demand brought by reforms in the sector has translated into heightened investor interest in the available warehouse stock.

While the trend, currently, is a mix of brownfield and greenfield projects, the shrinking opportunities would make greenfield investment the only way to participate in the asset play that the sector will have on offer. Meanwhile in light of the slump in the Indian residential market over the past few years and the track record of poor returns; investors preferred to invest in rent-yielding commercial assets.

With increased investor activity in the commercial segment and the acute shortage in supply of good quality of office space, the cap rates are declining and inching below 8% from the 9–10% range witnessed a few years ago. The risk-reward ratio would start becoming unfavourable as the cap rates start to decline further below 7–7.5%. As a result, there has been a considerable shift in investors’ focus towards the warehousing sector. The warehousing assets are offering a higher cap rate around 150–200 bps greater compared to what commercial assets are currently offering. Demand for large warehousing spaces is likely to see steady increase as occupiers now to move out of their smaller warehouses and consolidate their activities in larger facilities, which are presently in short supply compared to the demand. This demand-supply gap is visible in the current premium commanded by organised players owning these assets.

 For example, in the Bhiwandi warehousing cluster, the rents for unorganised spaces are as low as INR 9 per sq ft, whereas organised players are commanding rents in the range of INR 14–17 per sq ft in the same region. As more and more companies streamline their logistics networks, it would be observed that unorganised players or smaller organized players would consolidate or sell their assets to larger ones. The industry is expected to witness a structural shift over the next 3–5 years. The warehousing aspect in the logistics supply chain globally is going through a transformation. From being a mere storage space provider for goods, the segment is offering an array of value added services such as packaging, small scale manufacturing, cross docking, automation, algorithmbased demand forecasting and distribution centres. This transition would only happen if economies of scale come into play and companies are able to consolidate their spaces and move into larger warehouses.

The Indian warehousing industry which was lagging behind its global counterparts due to its fragmented structure would now enter the same league.

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