Investment Banking

Changing investment landscapes : The rise of India’s warehousing and logistics sectors

February 2019

Read Time: 7 minutes

The Indian industrial warehousing and logistics sector has come a long way in the last three years. Major transformations in the market, such as the rapid rise of e-commerce, have led to an increased demand for warehousing in the country. The Indian industrial warehousing sector has largely remained unorganized and underdeveloped – that is until now. Today warehousing and logistics are not simply seen as business processes, rather, they have become an integral part of the retail value chain, critical for sustained growth. 


The current scenario


Demand for Grade A warehousing space is on the rise. It is estimated that the demand will spike to about 300 million square feet by 2022, from approximately 100 million square feet today. As a result, the industry is clamoring for massive developments in this sector, attempting to make up the 200 million square feet difference in just four years. This effectively boils down to developing about 50 million square feet per year – a colossal challenge, but also a lucrative opportunity. 


This massive gap between demand and supply will fuel development and investments in the warehousing sector in the foreseeable future. Major cities like Ahmedabad, Bangalore, Chennai, Hyderabad, Kolkata, NCR, Pune, and Mumbai, are the top demand centres and numerous investment opportunities are opening up every day. 


In fact, given the widespread networks of e-commerce investments currently underway, even Tier 2 and Tier 3 cities such as Ambala, Coimbatore, Jaipur, Kanpur, Lucknow, Ludhiana, Madurai, Madurai, Nasik, Ranchi, Tiruchirappalli, and Surat, are fast becoming prime spots for investment in this sector as potentially worthwhile warehousing nodes. 


The first avenue of demand 


The first avenue of demand is from the multinational companies and Indian SME wanting to set-up small manufacturing/assembling units. These companies can now simply and quickly lease out the infrastructure they require for setting up manufacturing units, assembly units, and storage areas, essentially adopting a “infrastructure-as-a-service” model for tangible needs. This change in approach is based on the following reasons:


1. Easy financing solutions which require no upfront capital expenditure, allowing them to direct capital towards core business requirements.

2. Ease of entry to business since the time and effort needed to manage land acquisitions, organize approval and build factories and can be directed to dedicated teams that can then manage operations and maintenance.

3. Ease of exit from the business as there are no capital assets that need liquidation or resolution.

4. Companies benefit from having common shared facilities, such as civil and electrical services, which are split among various clients.


The second avenue of demand


The second avenue of demand is rooted in the overarching business-friendly shift in India’s industrial policy and economic agenda. The reasons for this are numerous. 


First, industry estimates predict that by 2025, the manufacturing sector is going to contribute nearly 25% of Gross Domestic Product (GDP), and play a pivotal role in the growth of the Indian economy. In particular, the ‘Make in India’ reform has been instrumental in supporting the manufacturing sector. These reforms recognize that warehousing and logistics form the backbone of the manufacturing sector and have been instrumental in the rising demand for new and existing spaces.


Second, the implementation of GST has led to a significant increase in profitability for developers in the warehousing sector. Companies are now able to maintain pre-GST service levels with lower levels of inventory and are leapfrogging the multiple barriers to entry. Previously, these players would have had to struggle with state regulations, run after local government bodies for clearances, and pay significant entry taxes. But now, these barriers have been removed, leading to faster turnarounds.


Third, government reforms ensure that warehousing and logistics facilities now fall under the infrastructure category, resulting in players gaining access to funds at lower costs. As a result, companies can now borrow funds over a longer repayment tenure, allowing for a sustainable growth model – something that wasn’t previously possible. As a corollary, lenders are also reacting and offering more competitive debt facilities to these warehousing and logistics players. This has led to industry analysts estimating over USD 7 billion in upcoming investments on warehouses, fulfilment centers and logistics parks in the next four years in India.


The fourth and final reason behind this avenue of demand, is the multi-fold increase in demand from e-commerce players over the last three years. Strong drive towards digitalization in the country, greater internet penetration and consumers who are getting increasingly tech savvy are pushing growth in the e-tailing sector. Consequently, the e-commerce industry is on a major growth curve, predicted to go from USD 3 billion in 2014 to USD 70 billion by 2019. In our assessment, this will result in the e-commerce industry gaining a significant market share in the Indian warehousing space over the next decade, further driving investment opportunities.


Rise in global partnerships 


In the midst of these exciting changes in the sector, developers and investors are finding new incentives for their short- and long-term investments. India is currently experiencing a significant availability of yield capital, unlike ever before. Major global long-term asset investors such as pension funds and sovereign funds are eager to enter the Indian market and expand their portfolios. Global industrial asset managers, backed by such investors, have become active in the Indian market.


Companies such as ESR, Logos and Mapletree have already begun forays into the Indian market, while financial sponsors such as Morgan Stanley, Xander, and Proprium are backing Indian platforms who are aiming to develop Grade A portfolios. With active talks between developers and financial players to develop warehousing platforms, we’ve already seen over 25 million square feet of warehouses being transacted across eight major Indian cities in 2018. 


Upcoming REITS and global investor interest in setting warehouse platforms will drive lucrative exit opportunities


The entrance of yield investors in the Indian market is becoming a source of great comfort for warehouse developers as it indicates a clear pathway to exit. As portfolios reach an optimum scale, these players will seek an exit within the three to five-year time frame, either through Sale to strategic investors or REITs. Some might even look to establish Real Estate Investment Trusts or REITS, depending on the status of REITS within the Indian scenario in the coming years. 


Moreover, the setting up of warehouse platforms is also a highly enticing venture for customers with pan-Indian businesses operations. Businesses no longer need to spend  resources making multiple deals with numerous local players, instead they can optimize their operations by partnering with larger players with presence in multiple locations.


According to our research, global leaders such as GLP, Prologis and Sagawa are poised to enter the Indian market within the next three to five years. GLP has recently included Indospace in its global network and will be an investor in their core fund. This will lead to greater exit opportunities for existing players in the warehousing space, and present a very lucrative investment opportunity for any investor who wishes to operate in this space for a mid-term duration, and cash out within five years.


Global players in the warehousing and logistics sector


Company

Domicile

Operating

Capacity

(sq-ft)

Geographic

Presence

Prologis

US

678 mn

US, Brazil, Canada, Mexico, Belgium, Czech Republic,

France, Germany, Hungary, Italy, Netherlands, Poland, Slovakia, Spain, Sweden, United Kingdom, China, Japan and Singapore

GLP

Singapore

550 mn

China, Japan, US and Brazil

IDI Gazeley

US

250 mn

North America, Europe and China

Goodman

Group

Australia

181 mn

Asia Pacific, the UK, Continental Europe, Brazil

and North America

Logicor

UK

147 mn

UK, France, Germany, Nordics, CEE, Spain, Italy,

Benelux, Portugal

Mapletree

Singapore

140 mn

Singapore, Australia, China, Germany, Hong Kong SAR,

India, Japan, Malaysia, South Korea, the UK,

the US and Vietnam

ESR

Singapore /

Hong Kong

75 mn

China, Singapore, South Korea and Japan

*As of 2017. Source: Company websites, research reports and news articles.


Economic model 


As the warehousing and logistics sector continues to entice developers and investors alike, first time investors should carefully consider the many scenarios that they may encounter in their investment journeys. 


Based on conservative, market-based assumptions, we can demonstrate how profitable and likely the returns could be. A development yield of 11% on any project with a timeframe of three-four years for development and leasing will deliver 20%+ IRR for investors if they can achieve an exit at 8% cap rate.


Basic economics of warehouse development and return expectations based on preliminary assumptions of rentals and costs  





Author: Prateek Jhawar, Director and Head, Infrastructure & Real Assets, Avendus Capital

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