Grade-A and B stock has grown to 169 million sq ft as against 138 million sq ft a year ago, and India鈥檚 warehousing sector is estimated to attract about Rs.701 billion over four to five years.
The year 2018 saw India鈥檚 warehousing and logistics sector coming of age, outshining ...
Grade-A and B stock has grown to 169 million sq ft as against 138 million sq ft a year ago, and India鈥檚 warehousing sector is estimated to attract about Rs.701 billion over four to five years.
The year 2018 saw India鈥檚 warehousing and logistics sector coming of age, outshining some conventional real-estate asset classes and attracting the attention of global investors.
Indeed, the year witnessed a 22-per-cent, year-on-year (YoY) growth in total stock in Grade-A and B warehousing space in the
top eight cities, while total
inventory in these cities evolved to 169 million sq ft in 2018 from
138 million sq ft a year ago. Interestingly, according to JLL, the absorption in total warehousing space also witnessed over
50 per cent growth YoY, reaching almost 32 million sq ft in 2018. Built-to-suit developments constituted 26 per cent of the absorption last year. Clearly, demand is outstripping supply significantly, with vacancies dropping below
10 per cent for the first time ever.
E-commerce driving growth
India looks at e-commerce as one of the fastest growing demand segments in the warehousing space. 鈥淲hen it comes to space requirement, currently, in-house (captive) logistics arms of large e-commerce players or retailers execute the most shipments, followed by e-commerce focused logistics service provides (LSPs) and traditional LSPs,鈥� says Chandranath Dey, Senior Director and Head-Industrial Consulting and Supply Chain Consulting, JLL India.
According to JLL India Industrial Research, over 20 per cent of warehouse absorption had direct and indirect e-commerce involvements in 2018. And as the Indian e-commerce market is expected to grow to $200 billion by 2026 from $38.5 billion in 2017 (IBEF report), space demand in this sector is likely to stay strong.
Logistics is a major driver of the e-commerce retail industry. The e-commerce retail logistics market in India is estimated at $1.35 billion in 2018 and expected to grow at a 36 per cent CAGR over the next five years (IBEF March 2019 report).
Development portfolio
Major developers in the warehousing space include IndoSpace, Embassy Group, Assetz, e-Shang Redwood and Panchshil Realty, among others.
IndoSpace has taken its total commitment to India to above
$3.2 billion to build out a pipeline of 120 million sq ft of modern logistics infrastructure. Currently, it has a portfolio of 31 million sq ft across developed and under-construction projects comprising
31 industrial and logistics parks in nine cities. 鈥淎ll parks are located in key manufacturing hubs, from the NCR in the north to Chennai in the south, making IndoSpace the only national network in India,鈥� says Rajesh Jaggi, Managing Partner, Real Estate, Everstone Group. IndoSpace started the year by launching its park in Bavla near Ahmedabad in Gujarat. It is continuing to evaluate opportunities to build logistics parks across Tier-II markets while expanding its presence in existing markets.
Embassy Industrial Parks has invested a total of Rs 7.4 billion in building two logistics parks in Gurugram and Rs 3.5 billion to build a 1.1-million-sq-ft industrial park in Chakan, Pune. The company is tapping Delhi-NCR, Mumbai, Bengaluru, Pune, Hosur, Hyderabad and Chennai, and will then move to other metros. It is already in the process of developing 200 acre in Chennai and 50 acre in Hosur, respectively.
Hiranandani Communities has launched its warehousing and logistics vertical, 鈥楪reenbase鈥�. It is developing about 10 million sq ft
in this space across India.
As Dr Niranjan Hiranandani, Chairman & Managing Director, Hiranandani Communities & GreenBase, shares, 鈥淲e are currently developing these parks in Pune, Chennai and Nashik, where we already hold land parcels. Infrastructure development work has begun in Pune, which is spread across 250 acre; and Chennai, nearly 100 acre. In the near future, we will target Tier-I and Tier-II cities such as Bengaluru, Bhiwandi, NCR, Hyderabad and Kolkata in Phase-2, where we have already initiated the land acquisition process.鈥�
What鈥檚 trending in
warehouse design?
A warehouse design needs to maximise the utility of space and equipment, so that warehousing operations can be optimised, thus achieving maximum efficiency.
鈥淭he dimensions and characteristics of warehouse infrastructure play a huge role in deciding the layout structure inside a warehouse,鈥� says Dr Hiranandani. 鈥淭hese features impact the design of shelves, capacity of the installations and the distribution of the goods inside the warehouse.鈥� He adds that a leakproof roofing system with insulation material, well-designed ventilation system, super-flat floors, internal docking and a robust fire-protection system provide a proper environment for the purpose of storing goods and materials that require protection from unavoidable elements. Wider truck docking aprons to cater to larger truck sizes, more truck dock positions for faster throughput, integrated logistics parks with shared infrastructure and amenities, designated truck parking areas and restrooms for drivers are other aspects that need consideration.
There is a huge demand for large-format, modern, Grade-A warehousing spaces with ample clear heights, optimised column spacing, flat and super-flat floors designed to support high cube racking, high dock-door ratios and extensive concrete truck courts. In Jaggi鈥檚 view, this allows for abundant creativity in laying out the plant and equipment. It also provides for easier movement within buildings. 鈥淲e have also observed a growing interest for built-to-suit warehouses for companies that want their facilities to be completely customised as per global specifications, including warehouses with refrigeration rooms or automation,鈥� he adds.
Clients now generally ask for
12 m of clear height for warehouses at eaves (below services), observes Aditya Virwani, COO, Embassy Group. 鈥淲ith more automation, FM2 flooring requirements have increased. Last is better lighting. Sustainability in lighting has always been one of the most popular requirements as the percentage of energy attributed to lighting a facility is quite high.鈥�
Operating models preferred
by developers
A majority of the preference in operating assets is in leased ready-built properties for tenants searching for medium to long-term occupancy. 鈥淲ith the evolving market, negotiation in terms of contract, where the developer is willing to comply with predefined specifications for development for their occupiers, is increasingly growing,鈥� observes Dey. This is resulting in build-to-suit developments that have become a lucrative and financially sustainable operating model for developers supported by assured occupancy for the long term. 鈥淢eanwhile, certain developers are also evaluating plot sale options targeted at industrial or light manufacturing players, considering their specific need of building development,鈥� he adds.
Embassy Group follows the buy, build and lease business model. 鈥淏asic support like electrical infrastructure, fire-fighting systems, ramps and dock levellers are some of our provisions,鈥� says Virwani. 鈥淲e pass on the responsibility of internal handling and operations onto tenants.鈥�
Clients prefer the leased model instead of a capex model, observes Hiranandani. 鈥淭his frees a lot of funds that they can, in turn, channel to upgrade the supply chain and systems. Also, they get ready to move into the facility and do not have to worry about approvals and the construction cycle.鈥�
Investors鈥� preference:
New or completed projects?
Major investors in the warehousing space include Ivanho茅 Cambridge and QuadReal Property Group, Ascendas Firstspace, Warburg Pincus, Canada Pension Plan Investment Board (CPPIB), Everstone Capital Management, Brookfield, DHL India and Allcargo Logistics, among others.
The tapping of warehouse space depends on investment appetite and horizon. 鈥淲hile new developments are being preferred by investors for a shorter horizon, many major institutional funds are exploring developments with a mix of completed projects with standard and quality design, facility and operational easiness as well as a land bank for future developments,鈥� observes Dey. Apart from these two types of developments of stabilised assets and a mix of land and stabilised assets, some investors are also exploring land-only options for the long term owing to the absence of suitable investment-grade assets at present, he adds.
Embassy Group is agnostic towards investing in new developments or completed projects as long as it makes business sense. 鈥淭he criteria for considering completed projects are when they meet our minimum specification offering and are fully compliant,鈥� adds Virwani.
An ICRA report states that investment platforms with good financial backing have shown their intention of growing through a mix of in-house development as well as acquisition of completed or under-construction properties. Owners of completed projects will be able to monetise their assets at good yields, whereas investment funds may see potential for further improvement in valuations through their operational strengths and asset improvements, as per the report.
Challenges remain
The most critical challenge in warehousing is still land-buying.
As Virwani highlights: 鈥淎cquiring the right piece of land with the right connectivity and scope for development within the right price is highly crucial. It is essential to make land acquisition rules consistent across states, thereby reducing entry barriers and mutation implications on cost and time. If all this is handled, robust logistics infrastructure can bridge the gap between Tier-I, Tier-II and Tier-III cities and rural areas.鈥�
A major challenge is conducting an operational assessment determining how much space you need to accomplish existing tasks and support sales growth, according to Dr Hiranandani. Then, how will space be best used? 鈥淭he location of the proposed warehouse facility is likely to be a key driver of implementation and ongoing transport costs,鈥� he responds. 鈥淭hus, speculation in land prices, last-mile infrastructure development and availability along with PEB vendors may have some impact; this needs a strategic approach for seamless flow of business in order to grow.鈥�
Foreign investments galore
Many large international players are now actively seeking entry points in the India warehousing market. 鈥淭he liquidity infusion by global investors is prompting the market to develop more Grade-A warehousing space,鈥� says Dey. 鈥淚ncreased capital will ensure more quality space is being built to fulfil the demand for warehouses near emerging urban areas across
the country.鈥�
Foreign investors are entering the sector through investment platforms with the mandate of investing in industrial warehousing parks across the major cities of the country, says the ICRA report. Often, this is done by partnering with a local developer or, in some cases, a global warehousing operator. Notably, the total amount of equity commitments to such platforms is at least $2.5 billion over the past two years. Such investment commitments can support assets under management of over 130 million sq ft, according to ICRA estimates. This is almost double the size of the current estimated stock of Grade-A industrial warehousing in India and about 10 times the operational portfolio of such platforms currently.
Warehousing way forward
Interestingly, while on one hand there are international developers and funds who are entering the Indian markets, on the other, there are national and regional domestic players in the country who are now evaluating the market potential.
As per JLL estimates, some key developers, including Allcargo Logistics, Ascendas, Embassy, ESR, IndoSpace and Logos India, are likely to command nearly
100 million sq ft of Grade-A space in the next four to five years.
鈥淎 number of private Indian developers, having either a strong presence in other asset classes in multiple cities or a strong local or regional presence, are also into investable-grade real estate,鈥� says Dey. 鈥淭hese include Apeejay,
ASV Mindspace, Goyal & Co, Hiranandani, Lodha Group,
K Raheja Corp, Musaddilal, Panchshil and Purvankara, among others.鈥� In addition, there are traditional local or regional warehousing players, such as
FWS, Global Group, GWC, KSH, Mascot, Prakhyat, Renaissance and RKV, among others.
Apart from being conventional storing services, warehousing now provides many value-added services. 鈥淭he sector is estimated to grow at 13-15 per cent in the medium term driven by growth in manufacturing, e-commerce,
FMCG and retail,鈥� says Virwani. What鈥檚 more, the India鈥檚 warehousing and logistics sector is predicted to attract nearly
$10 billion worth of investments over four to five years, with an addition of about 200 million sq ft of warehousing space across major ports, airports, and Tier-II cities.
With warehousing evidently turning to be India鈥檚 sunrise sector in real estate, several developers are making big plans. For instance, Embassy Group plans to invest $1 billion to address the challenges of companies grappling with inefficient industrial and warehousing spaces in a large, diverse and geographically distributed market like India.
鈥淲e aim to build 35 million sq ft of industrial and warehousing space over the next five years across India,鈥� says Virwani. The group has already signed MoUs with the governments of Haryana and Kolkata for over Rs 1 billion.
Its plan is to keep acquiring land, developing it and leasing it ahead to meet the ever-growing demands of customers.
鈥淚f only 10 per cent of this space is currently serviced by organised players, we have lots to do before we sleep!鈥� exclaims Virwani.
Indeed!
India鈥檚 top eight cities are driving warehousing opportunities.
Delhi-NCR remained buoyant, with over 25 per cent of total absorption.
There is a growing focus in Tier-II cities, including Coimbatore, Guwahati, Jaipur, Lucknow, Nagpur and Ludhiana.
Size and Cost of Warehouse Development
Owing to high demand, the average trending size for warehouse development in metros is increasing from 1-1.5 lakh sq ft to 3-5 lakh sq ft. In non-metro markets, it is between 50,000 sq ft and 75,000 sq ft.
From a client鈥檚 perspective, the option of flexibility and customisation in growing the space as per their business needs translates into value for money. 鈥淎lso, the turnaround time for each of these PEB structures is fast
(six to nine months),鈥� says Aditya Virwani, COO, Embassy Group.
鈥漈enants are increasingly looking for expansion options within the parks.鈥� Depending on specs and assuming you are providing top-notch infrastructure, the development cost can be anywhere between Rs 1,500 and Rs 2,200 per sq ft.
Need: Standardise building and design for warehouse development
For faster and quality warehouses, the foremost need is a standardised building code for warehouses, where there will be a general accepted guiding principle for all warehouse developers. As Aditya Virwani, COO, Embassy Group, shares: 鈥淣inety per cent of this segment is unorganised. Freely available, substandard warehouses are hampering customers and their operations. A clearly defined building code will eliminate all confusion around minimum specifications to offer. There will be a certain specified quality of infrastructure available. This will also benefit ease of building and design, and strongly support better infrastructure.鈥�
The Smart Warehouse Model
In warehousing, Amazon is known for pioneering the smart warehouse model; therefore, this concept is at times referred to as the Amazon Effect. According to a Knight Frank report, a smart warehouse is one where
all gadgets and devices are connected to each other via the Internet
(Internet of Things). They are also referred to as intelligent warehouses or warehouses that think. Robotics and automation are widely used in such setups. Amazon Kiva is a mobile robotic fulfilment system that tremendously increases efficiency in warehousing operations. Around 15,000 such robots have been deployed in Amazon鈥檚 latest Fulfilment Centres across the US. Amazon remains the torchbearer in the contemporary logistics space and continues to redefine and push the limits of the online selling business.
Key Emerging Trends in Warehousing
Shift in industry structure from fragmented and unorganised players to large organised players
Increasing institutional investor participation in the sector
Consolidation of warehouses from large number of multiple facilities to a few
larger centres
Reduction in inventory carrying costs for
major companies
Implementation of automation and
smart warehousing solutions in
warehouse operations
Transformation of warehouse from
just storage to
one providing
value-added services
