Policy reforms make warehousing attractive

The warehousing industry in India is undergoing an unprecedented transformation from a mere pro-vider of storage space within four walls into a modern day warehousing hub similar to the ones in developed countries. Logistics cost in India accounts for 13–17 per cent of the Gross Domestic Product (GDP), which is nearly double (6–9 per cent) the logistics cost to GDP ratio in developed countries such as the US, Hong Kong and France. Much of the higher cost could be attributed to absence of efficient inter-modal and multi-modal transport systems. Moreover, warehousing, which approximately accounts for 25 per cent of the logistics cost, has also been facing major challenges. This further added to the logistics cost borne by the end users and other stakeholders.

Majority of warehousing operations in India is being handled by small and fragmented unorganised players, which add to the cost. The share of large organised players is small, but growing steadily. Earlier, the incentives to enter India’s warehousing sector was minimal for organised players, as the occupiers themselves were content to engage with fringe partners offering low cost options with a network of small storage facilities near consumption centres. Multiple state and central level taxes made it sensible for companies to maintain multiple smaller warehouses in each state; as having multiple warehouses in different states reduced the cascading effects inter-state taxes. Further, this limited the focus on automation and higher throughput.

The biggest tax reform in the history of independent India – the Goods and Service Tax (GST), was introduced by the current government to make the entire nation a unified market by replacing multiple inter-state taxes. GST is also expected to reduce inefficiencies in the supply chain and also cause a phenomenal shift in the industry structure from unorganised to organised. If implemented properly it would eliminate the need to have multiple warehouses in each state and the companies would be able to operate out of single or few large warehouses based on their supply chain dynamics. It would also lead to consolidation in the sector.

In addition, the government has introduced several initiatives to augment the growth and encourage investments in the logistics and warehousing industry in India such as: granting infrastructure status to the logistics sector including warehousing industry, implementing the ‘Make in India’ programme and development of multimodal transport logistic park networks to promote the planned industrial/manufacturing corridors like Delhi-Mumbai Industrial Corridor (DMIC) and Delhi-Kolkata Industrial Corridor.

Over the past few years there has already been a gradual transition in the mindset of occupiers to use the services offered by organised segments. This change in mindset was further accentuated with the implementation of GST. A plethora of factors are driving this wave of change, such as:

Requirement from compliance regulators,

Stringent enforcement of penalties on non-complaint warehousing facilities,

Economies of scale being achieved through larger warehouses,

Safety and security of goods, efficiency in operations,

Demand for quicker turnarounds,

Need for efficient designs,

Advent of e-commerce, and

Entry of multinational businesses in the country that prefer to occupy only complaint facilities.

On the back of all these initiatives, there is huge scope for growth of the organised warehousing segments. The implementation of GST would accentuate the shift in industry structure from unorganised to organised. As per the latest warehousing report published by Knight Frank India, there has been an 85 per cent year-on-year (YoY) growth in annual leasing transactions in the warehousing industry within the organised s` egment in 2017. The transactions have increased from 13.9 million square feet in 2016 to 25.7 million square feet in 2017. In the years ahead, these transaction numbers are expected to remain strong, as the occupiers would realign their supply chain due to the implementation of GST and shift to large warehouses to make the most of their savings due to reduction in inventory levels and gain from economies of scale and efficiency in operations.

Going forward: Will the cap rate compression continue?

Investors have been aggressively taking up space across office, retail and warehousing assets. This exuberance has led to a drastic compression in cap rates across all these three asset classes over the past 3–5 years. Despite the compression in cap rates, the investors’ appetite for quality space seems undeterred. Investors entering the market today are expecting the cap rates to compress further up to 150 bps in the next 8–12 years. The projections are also in sync with the estimated exit time. They are hoping to get dual benefits – primarily from the growth in rental income and secondly from compression in cap rates.

Source: Knight Frank