Warehousing, a key growth sector to invest

Warehousing, a key growth sector to invest

In recent times, the Indian warehousing segment has evolved significantly, resulting in a gradual metamorphosis from the traditional concept of go-downs, which gradually moved to becoming modern formats of warehouses. This demand shall be driven by a combination of growing GDP, maturing industry segments, GST implementation, rising external trade and share of organised retail.

Good growth in past years

The warehousing sector has seen good growth in past few years due to various reasons. The ‘Make in India’ campaign ran big throughout the country encouraging enterprises to manufacture their products within India. India’s exports have considerably grown, which means the volume of goods being produced locally has increased. This has also propelled the demand for warehouses. The retail business also showed exponential growth because of relaxed FDI norms. This attracted both private and foreign investment.

Growth in the domestic manufacturing and retail segments has given impetus to the demand for efficient warehouse-management services. However, warehousing continues to see little investment. Apart from the manufacturing sector,  the agricultural warehousing and food processing industries contribute significantly to warehousing. This is followed by the ecommerce industry, service industry which leases warehouses for storage of crucial and important documents.

The construction industry and retail industry also account for some percentage of the demand for warehouses. It is anticipated that the surge in trade will demand enhanced sophistication in logistics infrastructure and services across models.

As international standards are introduced in a competitive, service-oriented environment, existing infrastructure will likely become obsolete. Small existing warehouses need to be replaced by large, modern warehouses that incorporate global standards such as tall designs, modular racking systems, palletisation, and the use of automation, IT and security, among others.

The GST rollout will have a significant impact on how taxation would be implemented on goods and services and across India. With GST in place, a uniform taxation code would be implemented thereby normalising the demand instead of the skewed supply demand dynamics, that we observe based on the tax regime each state implements. With GST, the movement of goods will be easier feeding for demand of warehousing across geographies using the hub and spoke model. Also, there will be reduction in supply time which is now skewed due to material scrutiny and location based tax compliance work.

The logistics and supply chain industry has been of great asset to Private Equity (PE) investors even before the GST bill was rolled out and given the huge potential in India merely based on growth and manufacturing activity of consumption. Already many funds have made high-value investments significantly into warehousing related developments and a few of them have also have made exits with good returns. With the implementation of the GST and improvement in the supply chain condition across India, it is likely to be a sunrise sector with more and more funds looking to invest into this sector. Few developers have already started exploring, with backing from various funds, to develop logistic parks etc, indicating the attractiveness of this sector.

Today, the demand is for high quality warehouses with modern amenities. However, there is still a mismatch in the supply and demand. There is dearth of quality warehousing with all amenities that most 3PL (Third-party logistics) or 4PL (Fourth-party logistics) look forward to leasing. However, sheds and godowns and other non-quality warehousing supply is high and usually meets the demand in most locations, prompting developers to get into development of Grade A warehouse which is in demand. Due to this void, there is large market for developers to capitalise on and as the experts suggest, a golden opportunity for PE investors. Existing infrastructure needs to be upgraded.

Issues of liquidity
Liquidity is not a problem with many investment funds especially equity. For developers getting into the development and construction of warehouses, liquidity is available to do supply chain infrastructure projects. However, specific businesses like cold storage, bulk storage and CFS (Container Freight Station), among others, have liquidity issues as the business has larger risks associated with them. But in case of the engineering goods, and IT, electronics and telecommunication sectors, there is relatively less risk associated because the goods are not perishable.

(The author is Chief Executive Officer of HDFC Realty)

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