Perks of investing in warehousing development vis-à-vis traditional real estate asset classes
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Although the concept of warehousing has been around for years, it was often underestimated in its erstwhile function as ‘a simple storage facility’. The warehousing sector’s meteoric rise to prominence in India was spurred by the introduction of GST leading to consolidation and the central government’s decision to grant ‘infrastructure status’ to the logistics sector including warehousing. Furthermore, with 100% FDI permitted in warehousing and logistics alongside maturated state-level warehousing policies, the sector has been seeing rapid institutionalization and subsequent inflow of major investments. In a post-covid-19 world where companies are looking at diversifying their supply chain; the government’s push for ‘vocal for local’, ‘Make in India’, and ‘Make for the World’ will only further oscillate the pendulum in favour of warehousing – ultimately translating into the building for capacity and more space.
The investments grew from USD 675 million during 2014-2016 to USD 2.3 billion from FY 2017-2019 in the top 8 cities of India. In 2020, the pandemic reinforced a structural shift in consumer preferences – accelerating the penetration of online sales even in tier-2 and tier-3 cities, thus giving a huge boost to the sector. Any e-commerce operation needs a strong and robust supply chain network, of which, modern warehousing forms a critical component. As global e-commerce companies rapidly look to expand in their battle for retail supremacy, investments in infrastructure like warehousing; especially well located, modern, compliant with very high construction quality; will remain a top priority. In a previous report, we have also estimated that e-commerce companies themselves will require at the very least 25 million sq. ft. of Grade-A warehousing stock in 2025 across the country which in 2020 was 9.3 million square feet.
It is estimated that investment in Indian real estate is expected to grow by 14.6% to Rs 396 billion from Rs 346 billion in 2020, as per Colliers Report. With institutional investors reallocating capital already raised for residential, co-living / co-working, retail, and hospitality; warehousing as a segment is becoming an asset class of choice. Fund managers as well now look at warehousing and industrial real estate as a safer, resilient, and scalable asset class for their investors.
Some key differences which make investing in warehousing better than traditional asset classes:
Amid the uncertainty and economic slowdown, banks, NBFCs, and real estate investment funds are working towards reducing exposure to development in traditional real estate sectors – both residential and commercial. Warehousing projects on the other hand are securing funding from banks at lower interest rates primarily because warehousing offers easier approvals, better scaling, and greater investment security.
When it comes to land acquisition for warehousing projects, it is possible to find contiguous land parcels with good connectivity to major highways as well as find land parcels in the right shape and good terrain within cities. Traditional asset classes such as residential and commercial real estate however require specific spaces in micro markets and near the city centre. These spaces are sought after hence overvalued and require a significant upfront investment. As a result, developers evaluate different options like tenanted land with slums or redevelopments where the acquisition is an uncertain time-consuming process.
Getting approvals for warehouse projects is also comparatively easier as it follows a standard procedure with enough precedence for clear timelines as most processes have a single-window approval system – the government is also working on a national logistics policy to further simplify the process. In the case of traditional asset classes approvals are time-consuming and need a significant budget, as multiple authorities are involved. In warehousing, most projects are developed with the base FSI of 0.45-0.55 while traditional developers trying to maximise the project FSI end up further delaying the approval process.
The time required for approvals has a substantial impact across the life cycle of project development. Offices and residential real estate projects already have a longer construction period of 3-5 years and high-rise buildings can take even longer – such extended timelines often lead to a significant cost escalation. These projects are also complex in terms of civil, mechanical equipment, electrical fittings, and HVAC since they cater to multiple tenants and buyers with different needs. Unlike warehousing projects, which on securing the necessary approvals, can develop within a span of 9-12 months as they are horizontal structures with a much shorter construction cycle.
Another difference between warehouses and traditional real estate assets is the ease of buying and leasing. Warehouses typically come with longer lease tenures as tenants spend high amounts on fit-outs and machinery. The need for large spaces in the case of warehouses means a smaller group of tenants and fewer occupiers per park. Since the occupiers are deep-pocketed institutional players and the demand is expected to grow faster than supply, there is a very low need to extensively market these projects. Warehousing projects see a substantial part of the development being built-to-suit, this implies that far lesser capital is at risk since development is not undertaken unless a tenant is in place. In the case of traditional real estate projects, extensive marketing is required to reach out to a large number of potential buyers and tenants. Over the years given the underperformance by developers, buyers want to see substantial construction progress before committing to buy or lease and hence require substantial capital from the developer to keep the project going. Given the number of developers and projects available, extensive marketing efforts are required in terms of time and resources to sell the project.
Thus, in 2021, as investors deal with rebalancing their portfolios to manage risk in the current times, warehousing presents one of the few bright spots in an otherwise difficult and complex real estate investment scenario.
This article was authored by Abdeali Tambawala – Principal – Fund management and Investment, Welspun One Logistics Parks