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Warehousing: The growth phase continues

Warehousing sector: The growth phase continues

Covid-19 pandemic gave a huge impetus to the warehousing sector, and this huge impetus continued even after the pandemic. The Government initiatives such as infrastructure status to logistics sector, GST implementation, 100% FDI in warehousing & storage, ‘Make-in-India’, Atmanirbhar Bharat, and the National Logistics Policy too are aiding the warehousing sector to register a stable growth

The growth in the warehousing sector witnessed during the Covid-19 pandemic has continued unabated. The growth during the pandemic was largely due to e-commerce, pharmaceuticals, food, and automotive sectors. “The Indian economic resiliency has enabled the warehousing sector to recoup from Covid pandemic rude shocks,” says Hemant Prabhu, Chief Operating Officer, Greenbase Industrial and Logistics Parks (a Hiranandani subsidiary). The Covid-19 induced lockdown followed by restricted movement of citizens to curtail the further spread of the pandemic opened new channels to purchase essentials. With shops and malls closed, buyers were left with the only option of purchasing essentials from e-commerce sites. This gave increased impetus to the warehousing sector. “An increase in online purchases and the subsequent expansion of India's logistics and warehousing industry can be directly attributed to the pandemic,” says Velprakash K, Executive Director & Head – Industrial Project Management, Savills India. During the pandemic, the sector has witnessed strong capital flows with institutional investors including the likes of CapitaLand Group, ESR, Indospace, Logos Group, amongst others developing warehouses across the major consumption centres. According to the India Warehousing Report by CREDAI and Anarock, warehousing is poised to become a US$ 2.8 billion industry in the near future. ““Government thrust on ease of doing business with focus on single window clearances by many states, land allotment, and even faster environmental clearances are aiding this sector extensively. This is the reason that its demand is increasing not only in metro cities but tier-II and -III cities as well rapidly,” said Harsh Vardhan Patodia, President, CREDAI.

Over the years the warehouse has undergone a drastic transformation. Gone are the days, when warehouses were mere ‘godowns’ to store goods. These godowns were normally located on the outskirts of the city limit. Today’s warehouses are full of technologies, automations, robots, material handling equipmentdronesconveyor systems and racking systems. With the advent of always-on e-commerce, the demand for faster responses, and the need to manage a larger number of stock keeping units (SKUs) with fewer errors, warehouses need to scale up and meet the standards of an intelligent, efficient, and automated warehouse. “Post Covid, the warehousing sector has followed a hub-and-spoke model to focus on reducing logistics cost and improving efficiencies. The model enables the availability of the products closer to the consumption points, consequently creating demand for the smaller warehouses within the city-limits as well,” says Hemant Prabhu. In this e-commerce age, automations are a must for warehouses. “When we speak of logistics, everything is time-bound. Each process depends on the one preceding it and a minor delay at one stage causes a magnified ripple effect on all the other stages. By the time we reach the stage of delivery, there ends up being a delay of days because of a few hours of down-time,” says Hemant Prabhu. 

Investment in warehouses

According to CREDAI-Anarock report 'India Warehousing - A Sunrise Sector', India will need to create adequate supply to meet an absorption of approximately 223 mn sq ft of Grade A warehousing demand over the next 3 years. Based on the data, the sector currently has 'dry powder' funding of $900 mn from existing commitments.  “This signifies a latent investment opportunity of further $2.8 bn in the warehousing sector in the near future. Much of this funding will need to target Grade A warehousing facilities, which is witnessing increasing demand due to its direct and indirect beneficial impacts on overall operational efficiencies,” says Shobhit Agarwal, MD & CEO, Anarock Capital. The CREDAI-Anarock report further adds, the absorption of Grade A warehousing increased from 34 mn sq ft in 2018 to 48.5 mn sq ft in 2021 at a CAGR of 12.6%. Meanwhile, supply in this category rose from 37.8 mn sq ft to 51 mn sq ft in the same period at a CAGR of 10.6%. The top 7 Indian cities (MMR, Hyderabad, Pune, Bengaluru, NCR, Chennai and Kolkata) witnessed approximately 160+ mn sq ft of Grade A warehouse leasing and was highest in the Western markets of MMR and Pune, followed by the primary Southern markets of Bangalore, Chennai and Hyderabad, which together saw 32% of the overall leasing volumes.

According to a report by Colliers, “During Jan-September 2022, industrial & warehousing demand witnessed a 9% rise on a YoY basis with a total gross absorption of 17.5 mn sq across the top 5 cities (Bengaluru, Chennai, Delhi NCR, Mumbai and Pune) in India. Demand remained resilient during the third quarter as well, at 6.7 mnsq ft, highest since Q1 2021. Third-party logistics players (3PLs) remain by far the top occupiers of warehousing space, contributing to over half of the total warehousing demand till date. Improved retail market sentiment amidst festive season and higher online spending continue to support warehousing growth and is expected to add to short-term demand addition. Delhi-NCR led the demand during YTD 2022 at 39% share, followed by Pune at 21% share in total leasing backed by robust demand from 3PL players, Engineering & E-commerce players. Tauru road and Luhari remained the most active micro-markets in Delhi-NCR, while Chakan-Talegaon continued to attract industrial occupiers in Pune. “India’s warehousing sector is gradually picking up pace with massive growth in 3rd party logistics. 3PL players contributed to half of the total warehousing demand during YTD2022 with an average deal size of 1.1 lakh sq ft. About 75% of the leasing by 3rd party logistics was through large sized deals.” says Vimal Nadar, Senior Director, Colliers India.

Grade A warehouses to outpace demand

The country is witnessing demand for Grade A warehouses. The Grade A warehouses are nearer to the city limit unlike Grade B and Grade C which are located in tier II and tier III cities. Being nearer to the city limit, Grade A warehouses can aid in delivering the products faster to the customers. Grade A warehouses are built according to international standards, have extra height, and high-performance flooring systems. The warehouses are technology enabled with artificial intelligence, drone pickup, Automatic Identification and Data Collection (AIDC), Automated Storage & Retrieval (ASRS), and QR codes to ensure faster processing. These spaces offer tangible benefits via green integrations, mechanized MHEs, fire safety protocols, sufficient docking stations and ample space for parking & vehicular movement. According to Sanjay Bajaj, Managing Director, Logistics & Industrial, India and Managing Director, Pune, JLL, the Grade A share in the stock has also increased from 39% in 2018 to 47% in 2021 showing increased interest from developers and institutional investors for quality spaces with higher storage handling capacity as well as shift in occupiers’ preference towards compliant spaces. “The Grade A assets offered by the organized branded players have emerged as a strong investment class amidst geo-political humdrum. The China plus one policy has skewed the interest of global investors to relocate their manufacturing base in India as a preferred destination. India has to alter its policy and tax regime to stay attractive and competitive for international market giants to invest in India. Ease of doing Business, standardization and automation are major growth levers for India to scale up the performance of its warehousing sector,” says Hemant Prabhu. According to the India Warehousing Report by CREDAI and Anarock, a total of 48.5 million sq ft of Grade-A warehouses have been leased in top 7 cities in 2021 and it’s expected to reach 55.8 million sq ft by end of 2023. the total area leased for Grade-A warehousing space in 7 cities was 160 million sq ft, with the largest share of 37 percent leased area in western region (Mumbai and Pune), followed by 32 percent in southern region (Bengaluru, Chennai and Hyderabad).  

Smooth road ahead

Like all the sectors that are affected by the ongoing Russia-Ukraine war, the warehousing sector too has been affected by the war. “Following the Russia-Ukraine war, basic costs of all commodities skyrocketed, greatly affecting the Return on Investment (RoI) on new warehouses being built. Steel prices peaked in the first and third quarters of this year,’ says Velprakash K. The other noticeable challenge the industry is facing post-Covid-19 is paucity of skilled manpower and steep increase of construction materials and  labour costs. “Aside from a noticeable change in construction costs, Covid-19 also generated some modest increases in material costs and disruptions in the supply chain. Because of growing material prices, such as crude oil, steel, aluminium, cement, labour, equipment rental charges, and plumbing and fixture expenses, construction costs have risen. So, various other technological options were investigated. Some suggested replacing steel members with a precast RCC purlin system to save steel consumption,” adds Velprakash K. Hemant Prabhu, too agrees and adds, “Post Covid-19, the ability to forecast future levels of business has become so difficult that many organizations are simply giving up trying. Instead of continuing to attempt to improve their forecasts, warehousing/logistics managers will need to become more agile and better able to respond to uncertainty. One needs to have a sound knowledge of demand planning, project management, IT & automation to evolve alongside technology interventions. Basic skill sets like negotiation, coordination, & understanding market dynamics, will always be the key to remain relevant for a logistics professional, both at present & in future.”

Apart from these few challenges, the road ahead for warehousing sector is going to be a smooth ride. The government initiatives such as ‘Make in India’, ‘Atmanirbhar Bharat’, PM Gati Shakti plan and the recently launched National Logistics Policy will aid in the growth of India’s warehousing sector. “Manufacturing has emerged as one of the high growth sectors in India. Prime Minister of India, Narendra Modi has launched the ‘Make in India’ & ‘Atmanirbhar Bharat’ program to place India on the world map as a manufacturing hub and give global recognition to the Indian economy. With the help of Make in India drive, India is on a path of becoming the hub for hi-tech manufacturing as global giants such as GE, Siemens, HTC, Toshiba, and Boeing have either set up or are in process of setting up manufacturing plants in India, attracted by India's market of more than a billion consumers and an increasing purchasing power. The National Logistics Policy unveiled by PM Narendra Modi is being billed as the country's first holistic approach for the $200-billion sector. NLP will be work as double engine of working along PM Gati Shakti Plan as it will continue to play an enormous role in the sustainable economic development of the country, by building a strong network of transportation system in the roadways, railways, airports, maritime, waterways, mass transport and in the logistics infrastructure,” says Hemant Prabhu.

Sensing opportunity, a slew of warehousing projects are coming up.  “We are looking to expand this to 30 million sq ft in the next 5 years’ time with additional land banks being added to our portfolio. We have very recently signed a MoU and Term sheet for acquiring additional lands at Kolkata, Bhiwandi & Bengaluru which will further push our developmental potential by another 10 million sq ft. In addition to these, we are looking to expand our land portfolio in some tier-2 cities which have huge growth potential due to the emergence of e-commerce buying in their population bases,” says Hemant Prabhu.  Recently, A P Moller - Maersk’s subsidiary Damco India has picked up warehousing space spread over nearly 2.43 lakh sq ft through a long-term lease of five years in Bhiwandi near Mumbai. Singapore-based Ascendas India Trust, through its trustee-manager Ascendas Property Fund Trustee, has entered into an agreement to acquire a 3.30 lakh-sq-ft warehouse at the Arshiya Free Trade Warehousing Zone at Panvel in Navi Mumbai from Arshiya Group for Rs 215 crore. Lodha Developers has entered into an agreement with Skechers to develop a 1.1-million-sq-ft warehouse and distribution center at Lodha Industrial and Logistics Park, Palava near Mumbai.

“Warehousing demand will continue to grow in future due to increasing demand resulting from increased consumption. Unceasing policy support from the Government in the last few years including infrastructure status to logistics sector, GST implementation, permitting 100% FDI in warehousing & storage has been crucial in attracting investments in this sector,” says Shobhit Agarwal.

With demand flowing in and investors & developers willing to invest in warehouses, the warehousing sector is for a stable growth.

 




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