The Warehousing Boom

BHIWANDI, ONCE THE POWER-LOOM hub of Western India, offers two contrasting visuals of hope and despair in the warehousing industry. The town, 40 kms from Mumbai, hosts automated cold storages on one side and shoddy unplanned godowns on the other. In fact, this April, a godown-cum-residential complex caved in, killing eight residents.

Bhiwandi emerged as one of the largest godown hubs in the country in the 1990s. Years later, the e-commerce boom catapulted demand for warehouses across the country, including Bhiwandi. But foundation for a major transformation was laid in 2017 when the Centre introduced Goods And Services Tax (GST) that removed state tax barriers and encouraged companies to lease/buy large warehouses near demand centres. The same year, it accorded logistics sector infrastructure status, giving it access to low-cost loans from banks.

Sensing the opportunity in warehousing infrastructure and expected rise in demand, institutional investors are pumping in capital. The sector has received $10 billion investment in six years since introduction of GST. The investment of $784 million in previous six-year period (2011-16) proves GST has been a huge driver of demand. And investors continue to be bullish. Asheesh Mohta, head of Real Estate Acquisitions India of U.S. private equity giant Blackstone, says there’s a tremendous potential for growth. The market has just 344 mn. sq. ft. warehousing stock compared to 13 bn. sq. ft. in U.S. “Fast-growing sectors such as retail, industrial, third-party logistics (3PL) and government support to infrastructure development will drive demand,” he says.

JLL says India’s warehousing Grade A and B supply is expected to reach 516 mn. sq. ft. by 2026. Total supply of leasing stock was 344 mn. sq. ft. in first half of 2023. Around 15 mn. sq. ft. was added in H1 2023 with Delhi-NCR, Mumbai and Bengaluru accounting for most of the addition. However, Shishir Baijal, chairman and MD, Knight Frank India, says warehousing transaction volume in FY23 equalled previous year’s record while stock levels exceeded 400 mn. sq. ft. The country’s top eight cities have been major drivers of supply — the Grade A stock there rose from 47 mn. sq. ft. to 161 mn. sq. ft. in six years until December 2022, according to JLL.

The boom is well and truly on but there’s a long road ahead. Grade B and C facilities are by and large not in a fabulous state. Shortage of space and damage from leaks are common.

Who Is Doing What

According to property consultant JLL India, Everstone-backed Indospace is the largest warehousing developer in the country with 22.79 mn. sq. ft. stock in December; 22.76 mn. sq. ft. is under construction. Indospace has invested about $3 billion and built 52 parks in 11 cities. Blackstone-backed Horizon Industrial Parks has 9.24 mn. sq. ft., while 15.33 mn. sq. ft. is under construction. The third-largest is ESR, backed by GIC and Allianz, with 8.95 mn. sq. ft.; a similar number is under construction. Blackstone is building a portfolio of 42 mn. sq. ft. which it wants to expand to 100 mn. sq. ft. in next three-five years. The market also has logistics arms of corporates—Mahindra Logistics, TVS Supply Chain Solutions and Welspun, apart from Indian investors/developers/3PL operators. A slew of start-ups are also making a mark.

Shashi Kiran Shetty, chairman, Allcargo Group, is among the few businessmen who spotted opportunities in warehousing early. Allcargo took over land parcels in eight primary markets — split into 31 warehousing clusters — and roped in Blackstone (which invested ₹380 crore) for developing logistics parks in consumption hubs. Recently, it demerged the business into TransIndia Real Estate and listed it on the bourses.

TVS Supply Chain Solutions, which started as a captive logistics and warehousing arm of TVS Motor Co, added third-party clients such as Daimler, Hero, Mahindra, Sony and Panasonic. The company recently concluded its ₹880 crore IPO. Vice chairman R. Dinesh says they want to be financially strong enough to capitalise on opportunities emerging in the sector. “The Indian economy is booming compared to the rest of the world. Multinational giants are looking to start manufacturing in India. It won’t be easy for them to set up warehousing and logistics operations from day one. The companies don’t need to do anything different here,” says Dinesh, who recently took charge as CII president. He adds the sector will have to flourish if the country’s economy is to do well. “There is no choice. It is an advantage for investors, warehouse developers and logistics players,” he says.

FY23 saw record demand. Last two financial years have seen transactions of 51.3 mn. sq. ft. each. Supply was 44-46 mn. sq. ft. in eight primary markets of Mumbai, Bengaluru, NCR, Pune, Hyderabad, Chennai, Ahmedabad and Kolkata. Grade A vacancy fell from 12% in FY22 to 10%. Grade B vacancy fell from 18% in FY22 to 14%. Overall vacancy was 12.2%. Knight Frank says rentals rose 3-8% in the eight primary markets. Biggest demand is coming from 3PL players. Volume transacted by e-commerce sector fell 71%, though, the main reason being changing consumer preference for buying offline. However, demand from retail, FMCG, automobile and engineering sectors remained strong.

To cater to the rising demand, the giant, public sector major Central Warehousing Corporation (CWC), is drawing up plans to expand with investments and partnerships. Amit Kumar Singh, managing director, CWC, says warehousing and logistics are the backbone of India’s global trade. “Requirements in agri-produce storage, including cold storage for perishable commodities, are rising. Government’s plan to promote 10,000 farmer producer organisations will drive demand for warehousing closer to farms,” he says.

The second trigger can be e-commerce. Though demand from e-commerce players has slowed after Covid, there is a huge scope for expansion in smaller cities. The third and most significant trigger is increase in manufacturing in India due to government’s production-linked incentive scheme and mega projects for building national highways and industrial corridors. This is an area where most large private investments are happening.

CWC has about 115 lakh MT capacity. Of this, 45% is being used for agri products. The rest is industrial commodities, e-commerce, etc. It is operating at 85% capacity. CWC started building Grade A facilities only recently. As of now, it has only two such facilities — in Bangalore (about 3.5 lakh square feet) and Greater Noida (3.25 lakh square feet, to be commissioned soon). “All big developers are into Grade A facility creation. We, being one of the largest land owners in this sector, see this as an opportunity,” says Singh. CWC plans to add about 47 lakh sq. ft. Grade A space this year and next year. It has earmarked about ₹1,000 crore for this. CWC is also looking at monetisation of assets through public-private partnerships. “I have identified about 85 locations where we will be going for modernisation and creation of facilities through private participation. We envisage an investment of ₹1,500 crore in next two years. Grade A facilities of 120 lakh sq. ft. will come from the private sector. Down the line, we plan to get into services, may be with private players,” says Singh.

A Bullish Industry

India is one of the fastest-growing markets with strong fundamentals, rising per capita incomes, growing middle-class, decent consumption growth and mass digitisation contributing to rapid growth of retail and e-commerce. Global and local brands will expand presence in India and look for flexible logistics and warehousing solutions, says Asheesh Mohta of Blackstone. For instance, Indian conglomerates such as Tata and Reliance have spent handsomely in FMCG to tap the opportunities in organised or packaged consumer products.

Government plans to accelerate the trend. Road Transport and Highways Minister Nitin Gadkari recently said government wants to reduce the country’s logistics costs (including warehousing) from 16% of GDP to 9% by end of 2024. The number is 12% in major European countries and U.S. and 8% in China. This will help companies optimise cost and make their products competitive. The government has proposed a policy to develop exclusive warehousing zones through public-private partnerships. “This will improve transportation and reduce logistics costs, creating business opportunities,” says Athul B. Birani, chief commercial officer, KSH Logistics.

With global companies diversifying supply chains, India has emerged as one of the credible manufacturing locations with two-third population aged between 18 and 55 years, Mehul Shah, CEO, Logos India, says in a report. “Investment by established industrial houses and manufacturers of new-age products such as e-vehicles and renewable energy equipment has propelled demand,” he adds.

“The warehousing industry is well-positioned for long-term growth driven by GDP expansion, increasing consumption and penetration in Tier II/III/IV cities. Regulatory focus on manufacturing and expansion of multi-modal parks and rail transportation networks will act as catalysts for long-term growth. Higher availability of FDI will also spur investments,” says Rampraveen Swaminathan, managing director & CEO, Mahindra Logistics.

Mahindra expects gradual increase in size of warehouses, strong shift towards Grade A facilities and greater expansion in smaller towns in next three-five years. “There will be a significant shift towards sustainability in warehousing characterised by renewable energy, circularity standards and sustainable practices. With increasing scale and complexity, we predict a shift towards higher automation and digitalisation through deployment of AI, robotics and material management technologies,” says Swaminathan.

Mahindra intends to grow its capacity to 30 mn. sq. ft. by primarily focusing on large multi-client formats with sustainability focus and implementation of advanced technologies. A CREDAI-ANAROCK report indicates Grade-A warehousing space demand of 223 mn. sq. ft. over three years with robust CAGR of 15.6%. The industry is moving towards advanced Grade A warehouses with radio frequency identification, stacking systems, sensors, multi-level structures and priority to safety and sustainability, says Rajaram Pai, chief business officer (industrial), Mahindra Lifespaces.

Cold storage chains also have a lot of room to grow. “The cold chain sector is witnessing huge growth, whether it’s seafood and poultry or fruits and vegetables,” says Vikas Choudaha, business head, Godrej Storage Solutions. The largest player in cold storage is Snowman, followed by Coldman and Coldrush.

Experts say this is a tough space considering the short shelf life of the products. MNCs in F&B are highly demanding, says Sunil Nair, CEO, Snowman Logistics. “The kind of audit they do with their global team and quality specifications they demand are stringent. So are their processes and compliances,” he says. This increases cost of operations. Snowman is into food and pharma. Its customers include Ikea’s restaurant business, Hindustan Unilever, McCain, KFC, Domino’s, Subway, Ferrero Roche and Mars. In pharmaceuticals, it serves Abbott and GSK, apart from a number of seafood exporters. Nair is pushing for higher prices as inflation in these segments has been more than 10% over last three-four years. “If you maintain compliances and global standards, the operations will become costlier,” he adds.

Mansi Mahansaria, founder and CEO, JustDeliveries, says F&B stocking and logistics is becoming critical and costly, especially with arrival of global food brands.

Complex Industry Model

Another challenge before warehousing players is the complicated industry model. There are two types of developments. One is called ‘speculative boxes’ where the developer builds standard features and gives the space on lease. The second is build-to-suit (BTS) model where the developer ties up with the customer, completes construction in 9-12 months and transfers to the lessee. In BTS, the customer looks for specific additional requirements such as more docks for loading and unloading, increase in height and installation of gadgets. Customers, in turn, pay higher rentals and opt for longer lock-ins. For instance, Decathlon’s warehouse costs 30% more. The lock-in period is nine years and lease period is 18 years. In comparison, lock-in for ecommerce players is usually three years and while lease period is nine years.

Land laws are another pain point. Foreign investors cannot buy land unless it’s non-agricultural. So, land aggregation is done by locals with political clout. The investors buy only after it is converted to non-agricultural usage. After buying the land, the investors appoint project management consultants such as JLL, Colliers and Knight Frank. This is followed by construction by contractors/builders. In most cases, customers make investments in software, mechanisation and automation.

In Allcargo’s case, it buys the land, which is the equity in the business. Banks lend 80-85% for construction. After the customer occupies the warehouse, it converts the construction land into lease rental discounting, a term loan offered against income-producing commercial assets/property for 7-12 years. After that, the property will be free from liabilities. The developer cannot monetise the property during the period of the loan. Mahindra is largely a 3PL player and does not buy the land. In case of FIIs, if they hold a majority stake, they will find the buyer after the loan ends. Otherwise, they will put the asset in real estate investment trust or infrastructure investment trust. Indospace and ESR enter when the land is ready. Blackstone and GIC are investors and don’t have any intention to enter the development business.

“The margin is 9-9.5%. The yield increases with years as rentals rise. The maintenance cost, mainly for common area, roads, lights around the warehouse and insurance premium, is not more than 5% of rental income. Land and asset value appreciation will be monetised at a premium when the developer exits,” says Jatin Chokshi, MD, Transindia Real Estate.

The life cycle of Grade A warehouses is at least 30 years. It can go up to 40-50 years. The 3PL players, which provide warehousing, logistics and inventory management, occupy the largest share of warehousing space (about 33% in FY22). They take care of inbound and outbound logistics. E-commerce players have leased 27% space. Manufacturing companies, including automotive manufacturers, are increasingly outsourcing inventory management, warehousing and logistics to 3PL players for better expertise and cost savings, says Chokshi.

The Challenges

The sector is still awaiting big money that can reduce the per sq. ft. cost of construction. It wants new technologies such as software solutions and data analytics to maintain optimal inventory and maximise space utilisation. What is also missing is mass adoption of tools such as collaborative mobile robots (Cobots) that guide associates through each task and enable faster order fulfilment, apart from technologies such as IoT, AI, sensors, barcode scanners and drones that enable warehouses to digitise processes, save time and make processes error-free. Drones, for instance, scan barcodes of products placed at heights that are difficult to reach.

India needs more Grade A capacities. The main problem is lack of government support. Availability of skilled labour is also one of the major concerns.

The cost of constructing a quality Grade A warehouse is ₹1,500-2,100 per sq. ft. depending on the contour of the land. The cost of land varies by a huge margin and depends on location and quality of infrastructure near the land parcel. Warehouse developers and operators say they are struggling to pass on material and electricity costs and prices should be brought down by at least 10%. So, high rentals are likely to continue.

The industry also seeks government incentives for expenditure on automation and a reduction in financing rates on capex. However, the CEO of TransIndia says the warehouses will generate enough cash flow from the day they are leased to repay the loans. The loans can be paid within 8-10 years. “Considering the 30-year life cycle of a warehouse, selling it after paying off the loan will fetch real value,” he says.

Some quick fixes can shift the sector to a higher gear.