While it’s a fact that the COVID-19 pandemic resulted in upending every sector in the country, but its wrath only unleashed a wave that served as catalyst for India’s industrial and logistics real-estate sector, with leasing on the rise and expected to touch a high of 100 mn sq ft by 2023 as e-commerce and manufacturing expand base in the country. Importantly, the entry of Indian business giants in the space signifies that the e-commerce segment is at the cusp of its next phase of growth and a major demand driver for India’s booming warehousing market.
Upamanyu Borah
As the coronavirus pandemic significantly impacted businesses and economy worldwide, consumers shifted consumption activity to online transactions. In the Indian context, given the rapid rise of e-commerce across non-metro cities, demand for storage spaces increased in tier II and III cities, which has further led to the growth of the logistics sector to keep up with the rising demand, ultimately driving real-estate growth.
A striking reason for the increased online spending per customer in these cities is driven by the development of last-mile delivery by the logistics companies and an exponential increase in the warehousing space.
A study earlier this year by consulting firm Praxis Global Alliance said that while in pre-COVID times (FY2018-2020), Grade A and B warehouses in India grew at 18 per cent CAGR, e-commerce and retail are expected to push growth of Grade A and B warehouses at a much faster pace over FY2018-2025.
This trajectory is expected to continue with annual investments being made to the tune of US$500 billion, with the projected compound annual growth rate (CAGR) for 2019-2025 standing at 10.5 per cent. Similarly, the investments made in the warehousing segment have increased by US$7.12 billion between 2018 and 2020. As the impact of the national lockdown became clearer, the leases and active request for proposal (RFPs) that were in various stages of completion reached full closure in the fourth and fifth quarters of 2020.
Latest perspectives on growth
Real-estate consultancy CBRE has projected that warehouse leasing, which reached a historic peak of 32 MSF in 2019, will touch nearly 100 MSF in the next three years.
Additionally, international property consultant Knight Frank in their latest report – India Warehousing Market Report – 2021 projects that annual warehousing transactions for the top eight Indian cities (primary markets) will grow at a CAGR of 19 per cent to 76.2 million sq ft (7.08 mn sq mt) by FY2026 from 31.7 million sq ft (2.95 mn sq mt) in FY2021.
As per the projections for the next 5 years (FY2022 – FY2026), the e-commerce segment is expected to take up significant space estimated to be 98 million sq ft (9.1 mn sq mt) approximately registering an increase of 165 per cent from the preceding period of FY2017 – FY2021. Third-party logistics (3PL) and other sector companies are expected to take up 56 per cent (83 mn sq ft) and 43 per cent (53 mn sq ft) more space respectively, over the same reference period.
With respect to total land committed to the warehousing development in the top 8 cities is approximately 22,488 acres, which will translate to a total buildable potential of up to 531 million sq ft. Existing warehousing stock already accounts for 329 million sq ft on this committed land, leaving about 202 million sq ft of potential warehousing space that can be developed in these land parcels.
Shishir Baijal, Chairman & Managing Director, Knight Frank India had said, “The past five quarters have been nothing short of a roller coaster ride as successive infection waves adversely impacted human life. During this period, most commercial real-estate asset classes have been impacted by the headwinds including the Indian warehousing sector. But inherent strength of the Indian economy, strong domestic consumer base and some unique opportunities arising out of the pandemic has mitigated the impact on the warehousing sector.”
“Supply chain disruptions from the pandemic have intensified the need for more institutional players in the warehousing segment which will ensure institutionalisation of the warehouse space, leading to greater participation from the big developers.”
“In the short run occupier activities will be dictated by the intensity of the pandemic however in the long-term perspective the sector should gain momentum aligning itself to India’s economy development trajectory,” Shishir added.
The Knight Frank report highlights that occupiers showed a marked preference for Grade A properties as they are much better geared toward tackling exigencies such as those posed by the pandemic. Increased demand by e-commerce companies also resulted in increased preference for Grade A properties. 65 per cent of all transactions during FY2021 were across Grade A properties with the exception of Bengaluru and Ahmedabad, more than half the area transacted in all the top markets occurred in Grade A properties.
Development of Grade A warehousing facilities has increased in recent years, currently constituting 35 per cent of the total stock compared to 34 per cent in FY2020. Pune (71 per cent) and Chennai (71 per cent) have the highest concentration of Grade A stock due to their primary demand base of auto and auto ancillary occupiers. Mumbai (18 per cent) and Delhi NCR (29 per cent) being older markets have a significantly lower proportion of Grade A warehouses.
The report also evaluates 13 secondary markets. These markets show strong future potential as their current share in transactions have grown consistently from 12 per cent in FY2019 to 23 per cent in FY2021. Secondary markets accounted for 9.7 million sq ft (0.9 mn sq mt) of warehousing transactions during FY2021.
As per the report, in FY2021, warehousing demand in secondary markets has grown 31 per cent y-o-y compared to a 23 per cent y-o-y de-growth for primary markets. The secondary markets contribute around 23 per cent of overall warehousing demand in India. Among the secondary markets, Indore and Jaipur noted exponential growth of 306 per cent and 219 per cent, respectively in FY 2021.
A recent Colliers report suggested that leasing in Grade A industrial and warehousing spaces touched 10.1 million sq ft in H1 of 2021 across the top five Indian cities of Bengaluru, Chennai, Delhi NCR, Mumbai, and Pune.
Delhi NCR led the leasing activity with a share of about 30.2 per cent, followed by Pune and Bengaluru with a share of 27.2 per cent and 20.0 per cent respectively. Almost 59 per cent of the total leasing was in Grade A industrial and warehousing facilities indicating increased inclination for high-grade structures.
The average length of warehousing leases is also getting longer, ranging from 6-9 years and even longer in some cases, the report noted.
On the supply front, the market witnessed 15.1 million sq ft of new building completions during H1 2021, a two-fold increase from H1 2020. Developers are racing to finish building completions to capture the burgeoning demand for industrial and warehousing space.
Delhi NCR accounted for almost 63 per cent of the new supply delivered in H1 2021, followed by Mumbai and Chennai accounting for 15 per cent and 11 per cent of the pie respectively.
Overall vacancy rate was at just over 12% with both Bengaluru and Chennai having the lowest vacancy rate of 6.3 per cent with Pune and Delhi NCR having the highest at 17.9 per cent and 17.4 per cent, respectively. All the cities saw an uptick in rentals in H1 2021 from those of last year. Bengaluru saw the steepest rise of about 19 per cent as demand outpaced supply, the report added.
Developers eye massive portfolio earnings uptick
One of Asia’s largest diversified real-estate groups, CapitaLand recently launched ‘CapitaLand India Logistics Fund II’, its second logistics private fund of US$400 million (Rs 22.5 billion) to expand in India’s warehousing sector.
CapitaLand India Logistics Fund II will invest in the development of logistics assets in key warehousing and manufacturing hubs in six major cities namely National Capital Region (NCR), Mumbai, Ahmedabad, Bangalore, Chennai, Pune as well as in emerging markets such as Coimbatore, Guwahati, Jaipur, Kolkata and Lucknow.
CapitaLand India Logistics Fund II will grow CapitaLand’s current total Funds Under Management (FUM) of US$79.2 billion across over 20 private funds and six listed trusts, further reinforcing CapitaLand’s position as one of the leading real-estate fund managers in the world.
The new fund follows the deployment of its first logistics fund, the US$400 million Ascendas India Logistics Programme, which was launched in 2018 to develop six projects in Bengaluru, Chennai, NCR and Pune. The projects have a total development potential of 12 million sq ft of space, two of which are operational with 2.8 million sq ft of leased space.
“The launch of CapitaLand’s second logistics fund in India is in line with the Group’s strategy to expand our fund management business to generate recurring Fee Related Earnings (FRE) and grow the Group’s Assets Under Management (AUM) in a capital efficient way. In 1Q 2021, CapitaLand’s FRE increased by more than 30 per cent year-on-year,”said Jonathan Yap, President- CapitaLand Financial, CapitaLand Group, who oversees CapitaLand’s business in India.
“Our target is to grow CapitaLand’s FUM to at least US$100 billion by 2024. We will do so by raising new funds across geographies and asset classes, as well as supporting the growth of our existing REITs, business trusts and private funds. We will continue to leverage CapitaLand’s real-estate investment and fund management capabilities to grow our funds in our core markets of Singapore, China, India, and Vietnam as well as our focus markets such as Australia, USA and Europe where there is strong investor demand,” Yap further added.
In 2018, Singapore-based Ascendas-Singbridge Group and real-estate firm Firstspace Realty entered India’s industrial logistics and warehousing market with their first fund. In 2019, CapitaLand completed the acquisition of Temasek Holdings-owned Ascendas-Singbridge.
Headquartered and listed in Singapore, CapitaLand owns and manages a global portfolio worth about US$137.7 billion as of March 31, 2021. In October 2019, CapitaLand announced that it aims to more than double its AUM in India to US$7 billion by 2024. Currently, CapitaLand’s total logistics AUM is about US$3.9 billion.
In total, CapitaLand targets to develop a logistics portfolio of 20 to 25 million sq ft of space in India by 2025. Ascendas-Firstspace manages the assets of Ascendas India Logistics Programme and CapitaLand India Logistics Fund II. Separately, Ascendas India Trust, a listed property trust, currently has seven warehouses located at the Arshiya Free Trade Warehousing Zone in Navi Mumbai.
Warburg Pincus-backed logistics development platform ESR is stepping up its investment in the industrial and warehousing space in the country, with a plan to operationalise 18 million sq ft portfolio in the next three years.
The company is also eyeing markets like Gurgaon, Chennai, and Bengaluru to expand its portfolio apart from venturing into tier II cities. The firm is looking to also acquire 8 warehousing projects across major hubs and these transactions are expected to be concluded over the next one year.
In December, ESR set up a second fund with Singapore’s sovereign fund GIC. The 80:20 strategic partnership of a US$750 million joint venture will see both the partners develop and acquire industrial and logistics assets in India.
ESR’s current portfolio is spread across nine cities, 15 locations, 700 acres of land acquired and 4.5 million sq ft warehousing under development. Apart from Pune, the company is currently developing warehousing projects at Hosur and Sriperumbudur in Tamil Nadu, Farrukhnagar and Bilaspur in Delhi NCR, and Kothur in Hyderabad.
In June this year, inked a Memorandum of Understanding (MoU) with the Government of Tamil Nadu for a potential investment of Rs 550 crores that will see the launch of two industrial parks in Kancheepuram and Krishnagiri districts of the state over the next five years.
According to a recent survey, Tamil Nadu emerged as the country’s top investment destination in the first quarter of 2020. The southern State accounted for 18.63 per cent of the Rs 97,859 crores of investments envisaged to execute 1,241 projects in the country. The diverse economic ecosystem makes Tamil Nadu a strong contender to attract investments globally.
Additionally, the momentous increase in the number of Grade A industrial parks shows that Chennai, the capital city of Tamil Nadu has become the nodal point for supply chain and logistics in South India.
In Oragadam, the industrial suburb of Chennai, ESR recently acquired 39 acres land to establish a state-of-the-art industrial and logistics park to be spread across 36 acres. Oragadam houses over 22 Fortune 500 companies and is an existing hub for sectors such as automobile, auto-ancillary, R&D centres, 3PLs, electronics, energy, aerospace and defence. ESR Oragadam facility is being developed to the highest specifications and will be equipped with best-in-class infrastructure, demonstrating the full scope of ESR’s sustainability initiatives and human-centric designs. It has been pre-certified gold by Indian Green Building Council (IGBC). With this investment, ESR had expanded its India footprint to 14 locations.
“The Government of Tamil Nadu has been very supportive in encouraging industrial developments in the state by creating a favourable business climate for industrial players. Our goals are aligned with the vision of the Tamil Nadu government, to create avenues to increase business and trade inclusion opportunities and employment towards garnering better economic growth in the region,” Abhijit Malkani, CEO and Country Head, ESR India was quoted saying.
“Chennai has always been one of the key markets in our portfolio with a robust industrial ecosystem. We look forward to bringing more high-quality occupiers to this facility soon.”
ESR India also inked a MoU with the government of Maharashtra envisaging Rs 4,310 crore investments for setting up 11 projects around Mumbai and Pune. This was later followed by the developer’s announcement to invest Rs 330 crore to develop a second industrial and logistics park spread over 38 acres at the industrial manufacturing hub of Chakan in Pune.
Chakan is known for prominent industrial clusters for engineering, automobile, electronics, FMCG, and logistics corporations. The location has access to a large talent pool and a well-developed social infrastructure with quality housing, retail malls, medical, educational facilities, making it an ideal destination for manufacturing and warehousing.
“Chakan has been a significant location for our expansion in India due to its established industrial ecosystem and increasing demand driven by national and global companies for Grade A spaces in this region. This second park in Chakan will address this demand and help us strengthen our position in the western region of the country,” Malkani had expressed.
ESR’s first logistics park in Chakan is spread over 53 acres in MIDC and is operational from the fourth quarter of 2019.
Within a series of ongoing developments, the company’s plan to develop a 36.5 acre Industrial and Logistics Park in Jalisana, an emerging industrial hub of North Gujarat has come as the latest.
Close to established automobile manufacturing clusters of Vitthalapur and Becharji, Jalisana benefits from an existing industrial ecosystem. ESR Jalisana will be an enabler for consolidation, with flexible leasing options from 40,000 sq ft to over 500,000 sq ft Grade A spaces, a rare opportunity in this region.
“We are excited to enter one of the fastest-growing industrial zones of the country, with a robust manufacturing base and an upsurge in e-commerce adoption. We are ready to contribute to Grade A spaces to further augment industrial and warehousing activity in the region. ESR Jalisana industrial and logistics park will boost ESR India’s footprint to 18 million sq ft across strategically significant locations,” Malkani said.
Meanwhile, India’s largest investor, developer, and manager of Grade A industrial real-estate and logistics parks, IndoSpace most recently launched its new industrial park in Narasapura, near Bengaluru. The park will boost IndoSpace’s footprint in the manufacturing and industrial destination of Karnataka, with its modern amenities catering to the rising demand for industrial warehousing and logistics across sectors.
The Bengaluru warehousing market has seen 4.30 million sq ft leasing in FY2020. By consolidating the warehousing market, developers are venturing into the city’s prominent clusters with land acquisitions for Greenfield developments and making it a preferred destination for Japanese, European and Korean companies in the electronics, FMCG, and FMCD sector.
Rajesh Jaggi, Vice-Chairman– Real-Estate, Everstone Group said in a statement, “By offering a solid foundation with our Grade A logistics infrastructure to customers across sectors, we aim to tap into the manufacturing boom being witnessed in the state of Karnataka. In addition, the launch of our new park in Narasapura will further help in attracting global manufacturers to the state of Karnataka.”
In June this year, IndoSpace also launched two parks in South India, in Vallam and Oragadam areas in Tamil Nadu, adding 118 acres to its regional portfolio.
The real-estate arm of Everstone Group, IndoSpace has a portfolio of over 43 million sq ft across 41 industrial and logistics parks pan-India. In 2020, it spent around US$500 million across nine acquisitions. Further, it plans to add four million sq ft of warehousing space by the end of 2021.
Earlier this year, IndoSpace and Model Economic Township, a subsidiary of Reliance Industries, have jointly acquired 55 acres at Farukhnagar, in Haryana, to develop a warehousing facility.
The land parcel has development potential of 1.28 million sq ft. With this, IndoSpace expanded its footprint in Delhi NCR to over 480 acres across eight industrial parks.
“We are excited to enter one of the fastest growing industrial zones in partnership with Model Economic Township as we continue to evaluate opportunities across the country,” Jaggi said.
“Model Economic Township’s expertise in developing large-scale industrial infrastructure in this micro-market will add significant value to this partnership. This project highlights IndoSpace’s focus on supporting the growth of India’s logistics sector, which will continue to expand robustly due to improved warehousing infrastructure,” he emphasised.
IndoSpace has been a pioneer in facilitating green warehousing in India. Through its commitment towards sustainability, IndoSpace continues to play an active role in the advocacy of green buildings and responsible operations. Additionally, IndoSpace Core’s Green Finance Framework is the first-ever globally to have incorporated EDGE certified green buildings in the warehousing space being externally reviewed by CICERO Shades of Green.
In line with this, IndoSpace won the ‘Logistics Deal of the Year – India’ honour at the Asset Triple A Infrastructure Awards 2021. It triumphed for closing a US$137.6-million green loan facility provided by The Hongkong and Shanghai Banking Corporation Limited (HSBC).
The loan facility is an extensive portfolio financing of logistics and warehousing, covering 14 projects in the prime warehousing hubs of Pune, Chennai, Bangalore and Delhi NCR. The loan will be used to finance or refinance certified green projects.
The green buildings have also achieved the EDGE certification by the International Finance Corporation, a member of the World Bank Group.
“IndoSpace moved to green warehousing early and is continuously integrating sustainability aspects into our operations and construction practices. The focus on efficient resource- management has been part of our blueprint from the start. I would like to credit the amazing team at IndoSpace, as well as the strong and collaborative relationships with our investors, customers and partners for these coveted recognitions,” Jaggi added.
Catching up to
In the coming years, the warehousing sector may see a shift in trends. As taxes have been reorganized across the country, and the Input Tax Credit (ITC) is now available across all product and service lines, outsourcing logistical activity is the next logical step for most sectors. The warehousing sector will undergo a significant evolutionary shift. Massive service upgrades by large, modern technology-based warehousing operators could potentially become a trend. The warehousing industry is maturing, and even newer developers have begun to include quality criteria and infrastructure as a regular offering.
