India’s Warehousing Landscape – Set to enter the next phase of development

India’s Warehousing and Logistics landscape has been going through a transformation these past few years. With the entire e-commerce concept picking up pace, the demand to have efficient supply chain systems in place has been growing. Recognizing the contribution of this segment to the country’s economic growth, the government has been implementing focused reforms and announcing policies aimed at further enhancing the sector and attracting investments.

According to CBRE research, since 2015, the logistics market has witnessed strong leasing each year, breaking the 10 million sq.ft. mark annually. The key sectors driving growth are FMCG, Engineering and Manufacturing, Third Party Logistics and E-commerce firms. Demand is being driven by the cities of Bangalore, Delhi- NCR and Chennai. The increase in capital inflows, focus on Make in India, entry of international players and consolidation in the market will result in demand for quality spaces, and supply chain efficiencies.

As India’s prominence as a global logistics hub grows, the segment is witnessing the entry of several global players and increasing awareness of domestic players to enhance the quality of offerings. This is resulting in the demand of warehousing that are in line with global standards. Two significant announcements made last year was the implementation of The Goods and Services Tax (GST) and granting of Infrastructure Status to the Logistics sector. These are expected to have significant implications for sectors across the country. With GST coming in, we expect there to be an increase in entry of reputed developers backed by institutional funding as well as a rise in demand for large mother warehouses.

The logistics sector is playing a larger role in India’s economic growth with the advent of technology and digital commerce. Keeping the sector’s development in mind, the government has made some significant announcements in Union Budget 2018, especially with the emphasis on high-ways, railway and inland water ways infrastructure; all of which are likely to result in enhanced cost and time efficiency for the transportation and logistics in India.

The proposed target of doubling 18,000 km of railway lines and said gauge conversion is underway to enhance capacity. Additionally, the government aims to add 9,000 kms to the highway network of India. Moreover, the budget focuses on constructing the rural infrastructure, earmarking Rs 14.34 lakh crore from extra budgetary and non-budgetary resources, provision of Rs 500 crore for “Operation Green” to promote agriculture logistics along with INR 168 crores for port development and modernization.”

As the market matures and grows, there are some key trends that will define the future of India’s warehousing market. According to CBRE, some of these emerging trends are:

A CONSOLIDATED, MORE EFFICIENT MARKET

Recently, CBRE India conducted a survey of leading occupiers of warehousing space in the country, to gauge their views around the GST, its impact on their business and operating costs, and the likely strategies post its implementation. Approximately 63% of respondents felt that the implementation of the GST would be positive for their overall business operations in India. Another interesting finding from the survey was that in the post-GST era, most warehousing space requirements would be driven by consolidation and expansion activity of occupiers. Close to 28% of respondents said they would consolidate, while 23% stated that they would further expand their operations across the country. A unified tax structure is expected to result in the emergence of a more consolidated market, with warehousing needs to be dictated by efficiency, and not concerns around taxation.

DEMAND TO MOVE BEYOND THE OBVIOUS EPICENTERS

Prior to GST coming into play, the bulk of the warehousing demand was concentrated across the top three urban centers of the Delhi National Capital Region (NCR) in the North, Mumbai Metropolitan Region (MMR) in the West and Bangalore in the South. As a significant development, 2016 emerged as a landmark year for the warehousing segment as the share of relatively smaller cities such as Hyderabad, Chennai, Kolkata and Pune increased in the overall space take-up.

“MANUFACTURING” - A GLOBAL AND LOCAL CONNECT

As per the Commerce Ministry, India aims to reach 3.5% of the total global trade by 2020 from its current share of 2%. Also, exports, which currently contribute 7.5% of the GDP, need to be pushed further as India signs Foreign Trade Agreements with economies such as Japan, Korea, Asean and Singapore. As the significance of foreign trade in India’s economy increases, manufacturers/exporters are likely to benefit from the potential demand from neighboring markets such as Nepal, Sri Lanka and South-East Asia. These regional opportunities could also be instrumental in driving the warehousing footprint of occupiers.

MORE ORGANISED OPERATIONS; INFLOW OF FORMAL SOURCES OF CAPITAL

As the warehousing sector moves towards a more systematic mode of operation, it is likely to witness the inflow of institutional funding and formal sources of capital. With the emergence of national players having larger warehouses, deployment of capital in these fewer, better quality assets are likely to become easier. However, given the fragmented and unorganized nature of the sector and limited local market expertise/instances of best practices, in majority of the cases, private equity funds have tied-up with regional developers.

INFRASTRUCTURE DEVELOPMENT TO ALLOW SUPPLY CHAIN EFFICIENCIES

As supply chains need to have a larger scale and become more agile, infrastructure development will have to respond to this need by becoming more forward-looking. The government has recognized investments in infrastructure as one of the key drivers of economic development. To fast track growth, the government has set up the National Investment and Infrastructure Fund (NIIF), as a quasi-sovereign wealth fund with a corpus of INR 0.4 trillion. The Union Budget 2017 emphasized the importance of a multi-modal transport network to allow the complete benefits of the GST and the “Make in India” programme to percolate. The government will develop 35 Multimodal Logistics Parks (MMLPs) in the country, which are expected to serve 50% of the freight movements, enabling 10% reduction in transportation costs and 12% cut in C02 emissions. The government is also working on the formulation of a formal uniform policy for the development of MMLPs.

DISRUPTIVE INNOVATIONS WILL DRIVE EFFICIENCY AND COST SAVINGS

While government policies and shifting demand patterns will be instrumental in shaping future trends, increasing technological applications will redefine the sector’s status-quo. There is already an increase in instances of e-commerce companies, 3PL players and online grocery chains utilizing information technology to manage their inventory better. The number of start-ups aimed at bridging the technology gap is also on the rise. Software that enables improved fleet management though live tracking of goods, RFID system for inventory identification, automated pallet storage, amongst others are being increasingly used. As clients become more demanding and the scale of operations grow, the use of technology will only increase. Going forward, India’s logistics and warehousing segment will be a significant contributor to India’s GDP growth.

FAVORABLE 2017; DEMAND TOUCHES ALL TIME HIGH

The growth momentum continued and a milestone for warehousing demand was achieved in 2017 as leasing activity reached an all-time high of approximately 17 million sq. ft. by year end. Demand observed an increase of about 20% compared to the previous year. Interestingly demand was no longer limited to the top three cities and the share of relatively smaller cities such as Hyderabad, Chennai, Kolkata and Pune was collectively recorded at about 33% of overall leasing during 2017.

Strong and sustained economic growth over the past few years has led to healthy demand for warehousing and industrial space in India. The country’s favorable population composition and increasing disposable incomes has bolstered consumption led demand for warehousing while the Government’s ‘Make in India’ campaign has induced large scale investments resulting in strong demand from the manufacturing sector. This coupled with increasing focus on operational efficiency and growth of new business sectors such as e-Commerce, has led to an increase in leasing of modern warehousing space from an average of 7.4 million sq. ft. during 2012–14 to approximately 13.7 million sq. ft. during 2015–17.

Further, the Goods and Services Tax (GST)  pegged to transform India into a single integrated market. In the pre-GST era, the structure and organization of India’s warehousing industry reflected a preoccupation with the multiplicity of tax in the country. Implementation of GST, the uniform tax regime, has simplified interstate taxation and stimulated structural change in operation dynamics for the warehousing and logistics segment. This has increased global competitiveness of the country by attracting foreign players to enter Indian logistics market via mergers and acquisition, joint ventures, etc.