The Logistics & Industrial (L&I) segment within the Indian real estate space has been on the radar of several real-estate focused private equity investors since the market opened-up post GST rollout. In the most recent quarter (Q2-21), over half of the total PE investments in the overall real estate was channeled into the L&I space, with warehousing segment as the primary driver owing to numerous reasons that we intend to highlight in this article. Now, with HNIs and Indian corporate houses also in the fray to undertake sale/purchase of warehousing assets in tier-II and III cities, there is further exuberance in this market.
Spurt in digital adoption leads to demand-supply mismatches
Over the last six quarters since start of the pandemic, a widespread adoption of digital stream in India has resulted in meteoric growth in the e-commerce segment. Currently, this demand is hugely focused on large consumer markets of Mumbai MMR, Delhi NCR and Bengaluru, among few others. However, we are gradually seeing demand percolate to relatively smaller markets as well. As a result, quality supply, which can cater to requirements of a fulfillment center (FC) of large 3PL and e-commerce players has come in short supply. This demand-supply mismatch is even likely to shift a portion of the latent demand to Grade-B facilities, thereby reducing existing vacancies in such warehouses too in the near-term.
Deal sizes on the rise; newer markets emerge
The average deal sizes across three major cities of Mumbai MMR, Delhi NCR and Bengaluru have witnessed a rise. Individual transactions above 100,000 sq. ft. increased by 50% in 1H-2021 on a y-o-y basis, thereby raising the bar in terms of deal size & quality space requirements. Besides the traditional sectors of FMCG, manufacturing, and automotive, certain newly emerged sectors of e-commerce as well as other tech-based platforms (online car dealers, online groceries, DIY furniture etc.) are demanding large-sized facilities at single locations.
Established L&I markets such as Bhiwandi (Mumbai), Chakan (Pune), Bilaspur (NCR), Bommasandra (Bengaluru) are nearing saturation or lack space for bigger Grade-A developments. Therefore, over the years, we have witnessed growth in newer markets within these cities. As a result, markets like Taloja near Mumbai, North West corridor near Bengaluru, Sriperumbudur near Chennai, and Farukhnagar near NCR are rapidly developing. Some of these emerging markets now have high presence of Grade-A warehouses, therefore, commanding rentals that are similar or higher than the established markets.
Scope for growth of the organized sector is fast emerging
Dearth of quality spaces have resulted in many companies opting for space in conveniently located Grade-B spaces as well, although there is a greater sense that a gap in quality persists and must be bridged soon. Large developers as well as institutional investors are already in the process of executing 85-90 msf of new warehousing space. These are expected to be completed over the next 24-30 months, bringing relief to manufacturers, logistics players as well as online retailing businesses. Clients are preferring to drift away from traditional landlords to more professionally-run / institutional landlords, thereby enabling the organized players to increase market share rapidly.
Significant institutional interest
A rising interest by large foreign investors has led to L&I market yield compression as more money now chases limited number of quality assets. Yields that were in the range of 8.0-9.0% until a year back is gradually coming down, with recent few deals observed at sub-8.0% yields.
Conducive ecosystem created by the government
Policies of the last few years along with aggressive plans for infrastructure development including highways, airports and capacity expansion at ports will further the growth achieved by creating an enabling ecosystem. The granting of “infra status” to the sector, 100% FDI permit under the automatic route, GST and production-linked incentive (PLI) schemes have together helped spur demand. Furthermore, the much-awaited National Logistics Policy aims to enhance competitiveness of the sector through targeted reduction in logistics cost.
The way forward
The under-current of rising institutional participation and technology-adoption will ensure adequate fund flows as well as technical know-how within the Indian L&I space. The aggression displayed by institutional players firms-up our belief that a market consolidation could be happening in the near-to-medium term, with few large operators enjoying a reasonably dominant market share. More entrenched organized players will bring in best practices in warehouse design, management, and automation.