The growth of warehousing market in India

Warehousing spaces are in demand post-pandemic, and the industry has emerged as a resilient asset class

Warehousing spaces are in demand post-pandemic, and the industry has emerged as a resilient asset class

The Indian warehousing market has garnered attention from global and domestic institutional investors over the years. In recent times, it has been on a high growth trajectory. Since the outbreak of COVID-19, the usage of warehousing facilities by e-commerce platforms has risen sharply as demand for goods has been at an unprecedented high, boosting the e-commerce market and warehousing space requirements alike. The organized food delivery segment has also grown because of the pandemic, augmenting cold chain warehousing space requirement. As a result, the warehousing industry has emerged as a resilient asset class and continues to show an uptrend within the real estate sector. A lot of capital is allocated to the technological infrastructure of the warehouse, to ensure automation and efficient operations.

Warehouse construction costs are much lower. As a result, the asset is a more affordable choice in the domain of commercial real estate. The occupancy rate for warehouses is also high because of their low cost. The tenants of a warehouse typically spend around nine to 15 years compared to commercial office leases, which have a lock-in period of around three to five years. A warehouse investment is, therefore, more reliable and stable.

Ecommerce expansion

The warehousing market in India is expected to grow to ₹2243.79 billion by 2026, expanding at a CAGR of 10.90%, as per the Warehousing Market in India 2022 Report published by Netscribes (India) Pvt Ltd.

The Indian e-commerce industry is playing a major role in this growth. Due to the pandemic-induced lockdowns, consumers started to rely on e-commerce players for the delivery of food and grocery items.

There was more focus on the same-day delivery model. Consequently, e-commerce companies are trying to stock more inventories closer to customers’ locations to improve the quality of products upon delivery, and optimize efficiency. This, in turn, increases their demand for warehousing in tier-1 and tier-2 cities.

3PL revolution

The growth of third-party logistics is the second-largest incentive causing the rise in demand for warehouses. In 2021, the 3PL (third-party logistics) sector acquired the maximum warehousing space, succeeded by e-commerce. Due to increasing Foreign Direct Investments and relaxed policy reforms, the agriculture and manufacturing sectors will continue to increase 3PL warehousing demand. The newer industries like e-commerce with 30 minutes and 10 minutes deliveries in the last-mile segment, telecommunications, healthcare, and IT will be other stronger driving forces for 3PL warehousing.

Warehouse construction costs are much lower. As a result, the asset is a more affordable choice in the domain of commercial real estate. † Photo Credit: Getty Images/iStockphoto

After the government introduced the Production Linked Incentive (PLI) scheme, many sectors, including food processing, mobile devices, pharmaceuticals, and automobile components, poured large investments into setting up manufacturing plants in India. The country’s ‘Make in India’, ‘Atmanirbhar Bharat’, and ‘Vocal for Local’ campaigns have also led to a positive response with a rise in demand. Moreover, the government’s Bharatmala Project focuses on establishing 35 multimodal logistics parks throughout the country, with four proposed for development in Maharashtra under the Public-Private Partnership. Such a mix of logistics operations is expected to boost the logistics and warehouse operations in the country.

Reforms and logistics

In addition, with India’s significant policy changes, the interest of foreign investors to increase their footprint in the country by way of investments in the warehousing and logistics sectors has witnessed an uptick. Systematic reforms such as the introduction of goods and services tax (GST), tax benefits to FDI investments, interest rate cuts, and corporate tax reforms have made investors keen to explore the new industrial asset class. A minimum investment of ₹2 crores is needed. Investors can buy standalone warehouses, which require higher capital allocation. They can also buy units/galas, which are demarcated areas of the warehouse (lower ticket size option).

The industrial and warehouse real estate market in India is witnessing a steady growth and expansion and this is likely to continue. The investment is more stable in terms of the consistency of rental as opposed to office spaces. Considering the potential of online sales, many businesses are switching to omnichannel business models and scrambling for additional warehouse capacity across cities. 3PL, the government’s tax benefits to FDI investments, the growth potential of e-commerce, and India’s cost advantage are all driving forces attracting a sizable foreign investment into the logistics, manufacturing, and warehousing sectors.

However, whether a warehouse investment is good or bad depends on its location, the economy, the real estate investor’s capacity and risk appetite.

Real estate investors who are confident in their investment should opt for direct warehouse purchases.

Real estate investors who are confident in their investment should opt for direct warehouse purchases. † Photo Credit: Getty Images/iStockphoto

How to invest in a warehouse

There are three ways by which real estate investors can become a part of the booming warehouse industry.

Direct warehouse investment: Real estate investors who are confident in their investment should opt for direct warehouse purchases. After buying the warehouse, the investor can rent it out to different businesses to earn attractive returns. Or they can also buy prereleased (already rent generating warehouses), which will minimize their leasing risk

REITs: REIT refers to Real Estate Investment Trust. This prominent vehicle in the real estate industry allows individuals to invest in large-scale, income-generating real estate assets. Using REITs to invest in warehouses is the safest strategy, especially for those who are new to the market and do not have sufficient knowledge of the market

Converting existing retail spaces into warehouse facilities: Commercial real estate investors who have retail space investments and are facing defaulting retail tenants can consider flipping lesser utilized retail spaces or ground-level office spaces into small warehouses. It is prudent to select a low-cost warehouse site for the conversion and earn revenue in the long run

The writer is co-founder, PropReturns.

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