With retail and office space segments adversely affected following the Coronavirus pandemic, we look at how the logistics and warehousing segment has the potential to lead the recovery in the real estate sector
Much before the onset of the Coronavirus pandemic, the Indian real estate sector was already battling with a consistent slowdown. While the success of real estate investment trusts (REITs) had given it a glimmer of hope, fund managers had their eyes set on a segment that they believed had the potential, to not just spread across the country but boost segments as well, including housing.
This segment, warehousing and logistics, has hence emerged as mainstream in the last few years. The outbreak of the Coronavirus has only strengthened the belief of fund managers that warehousing and logistics would prove to be a catalyst for revival in the post-COVID-19 world. In a consumption-driven economy like India, the lockdown exposed the fact that this segment, in spite of its growth potential, was still an under-supplied segment of real estate.
Why is Indian warehousing market in demand?
In a changed world today, the definition of what constitutes mainstream property has blurred. Hotels, offices and retail, seen till recently as income-producing asset classes, are no more attractive to the investors. The office market is faced with an uncertainty future, with work-from-home likely to remain a predominant reality for the next few years. In contrast, logistics and warehouse spaces are increasingly gaining traction.
The introduction of the nation-wide Goods and Services Tax (GST) in 2017 (which replaced numerous state taxes that had made it difficult to establish national logistics networks), has encouraged investors in this space. Today, large firms like GLP, ESR and Logos have invested heavily in establishing their operations in India. For example, GLP has joined hands with India’s largest logistics specialist Indospace, with capital from Canadian group CPPIB.
There is a general belief that India’s logistics real estate sector will continue to grow, due to the growth of e-commerce and changes in consumption habits. It is, hence, no surprise that large deals are happening, in the middle of the pandemic. At a time when the government has shifted its focus to encourage local manufacturing, while the world also attempts to look at a ‘China plus one’ strategy to de-risk global supply chains, investors in logistics and warehousing are very optimistic.
Furthermore, with international businesses like Amazon looking seriously at India to take advantage of the world’s second largest population, the demand for warehousing is a logical outcome. India is spending 1.5 trillion dollars on infrastructure over the next five years. This is likely to give ample growth opportunities for the logistics, industrial and manufacturing sectors.
Indian logistics and warehousing: What is driving its transformation?
- Demand far exceeds supply.
- The introduction of a national Goods and Services Tax (GST) in 2017, has encouraged the investors in this space.
- The government’s focus has shifted towards encouraging local manufacturing.
- The world is looking at a ‘China plus one’ strategy, to de-risk global supply chains.
- Tier-2 and tier-3 cities are more cost-effective, from an investment standpoint.
- Consumption demand is equally bullish in tier-2 and tier-3 cities.
- Growth in logistics and warehousing to create more jobs in smaller towns.
- Growth of the warehousing and logistics segment will have a spillover effect on the economy, leading to greater housing demand in smaller cities.
Economists believe that the growth pattern of the country, which has been limited to the top eight cities, needs a relook. Logistics and warehousing has the potential to generate overall real estate demand in tier-2 and tier-3 cities. It will also decongest the top cities, since urban sprawling would lead to real estate growth in tier-2 and tier-3 cities, they maintain.
How logistics and warehousing can boost Indian real estate
According to JC Sharma, VC and MD of Sobha Limited, infrastructure development and setting up of industries, are crucial for urban development, which will ensure growth in tier-2 and tier-3 cities. It is time for the government to step up investment spending. The government has created a National Infrastructure Pipeline, which has 6,866 projects, collectively costing USD 1.7 trillion. These need to be operationalised. Having a strong infrastructure base is critical for uniform and sustainable economic development in the country, as lack of it has proven to be a bottleneck for growth, he maintains. “Good quality mobility, roads, rail network, electricity, connectivity with larger metros and development of adequate social infrastructure, will go a long way in establishing these industrial hubs within smaller cities. Growth of industries and real estate in these parts of the country will help iron out the lopsided model of economic development, which is, at present, concentrated in and around a few metro cities alone,” says Sharma.
Apurva Gupta, chief marketing officer, Rivali Park, CCI, believes that while India and the global economy continue to deal with the health and financial repercussions of the COVID-19 pandemic, India’s logistics and warehousing segment has emerged as an encouraging real estate avenue. One of the major trends observed in the post-COVID-19 scenario is the rise of tier-2 and tier-3 cities, as hubs of logistics and warehousing. “A series of government initiatives like the improvement in ‘Ease of Doing Business Index’, along with the proposed National Logistics Policy and National E-commerce Policy, are expected to lay the sector’s roadmap for advancement in these cities. The advantages in terms of low rentals, availability of manpower at an abridged cost and high vacancy levels, will drive this growth, lending a positive thrush towards creating more employment opportunities in these areas. This has indirectly spurred residential housing, which is expected to increase in the years to come,” says Gupta.
Which cities will emerge as preferred destinations for warehousing and logistics?
Cities like Vapi, Surat, Lucknow, Patna, Coimbatore, Ludhiana, Guwahati, Siliguri and Bhubaneshwar are already witnessing a surge in warehousing demand. The restriction on movement during the nationwide lockdown, has underlined the vitality of in-city warehousing, with tier-2 and tier-3 belts developing as chosen investment destinations. The upcoming Delhi Mumbai Industrial Corridor (DMIC) and many other industrial corridors, could boost logistics and warehousing in smaller connecting cities. Developing capacities to manufacture goods within the country, will have a multiplier effect – it will give a fillip to construction activity, provide jobs to construction workers and boost the demand for necessary goods and services. Investment in logistics and warehousing today, hence, will provide an early mover advantage, owing to its backward and forward linkage with the overall demand and encourage the growth of other segments of real estate.