The supply of industrial and warehouse logistics parks is anticipated to increase by 13-15% YoY in FY 2023-24 across the eight key markets, reaching approximately 435 million square feet. Although Tier 1 cities are the primary focus of investor attention, the growing expansion requirements driven by e-commerce and 3PL firms have resulted in the establishment of Grade A warehouses in Tier 2 and Tier 3 cities, drawing investments in these locations.
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Ratings agency ICRA has estimated that the supply of industrial and warehousing logistics parks will grow by 13-15% YoY in FY 2023-24 to reach 435 million sq ft across the eight primary markets. In 2021 and 2022, institutional real estate investment in warehouses accounted for 27% and 31% of total institutional real estate investment respectively, outpacing other asset classes including residential and retail.
The incremental absorption is anticipated to stay at the same level as in 2022-2023, or about 39 million square feet. In these key markets, which include Mumbai, the National Capital Region, Pune, Chennai, Bengaluru, Kolkata, Hyderabad, and Ahmedabad, about 52% of the anticipated supply augmentation will be in the grade A category.
Looking over the fact that the logistics sector in India is predicted to account for 14.4% of the GDP, provides a futuristic bundle of opportunities ahead.
Market profile
According to forecasts, the Indian warehousing industry is expected to grow at a CAGR of 15.64 % from 2022 to 2027, reaching US$ 34.99 billion. The warehousing industry in India has altered significantly because of modern storage facilities and technology-driven solutions.
Additionally, the government’s emphasis on Make-in-India and the PLI programmes, which promote manufacturing, quick growth of other industries like e-commerce and associated services and rising consumer demand have all contributed to increase in warehousing demand. As of March 2023, the top five markets in India—Mumbai, NCR, Pune, Chennai, and Kolkata—accounted for 75-78% of the country’s total warehouse stock, with a strong occupancy rate of approximately 90%. Mumbai and the NCR are anticipated to have close to 50% of the entire stock as of March 2024. There are 572+ warehousing companies in India.
The COVID-19 outbreak has been particularly advantageous for the warehousing and logistics sector, which has seen its share rise from 2% in 2020 to 20% in 2021. The pandemic caused a transition in online shopping from optional to necessity, which made the e-commerce sector more lucrative.
Although Tier 1 cities are the primary focus of investor attention, the growing expansion requirements driven by e-commerce and 3PL firms have resulted in the establishment of Grade A warehouses in Tier 2 and Tier 3 cities, drawing investments in these locations. This is driven by the growing use of the internet, the government’s push for “Digital India,” rising disposable incomes, growing awareness of brands, and aspirations for a greater standard of life.
Source: ASSOCHAM
3PL/Logistics has been the dominant category for warehouse space in the past five years. E-commerce has grown, causing demand for space in various sectors like retail, supermarkets, pharmacies, and food delivery. Demand from consumption-based sectors like Retail and FMCG has also grown. Automotive industries are anticipated to develop at rates of 8-9% and 6-9%, respectively, in 2023–24, accounting for around half of the occupied warehouse space in March 2023. The rapidly growing e-commerce industry is also anticipated to increase warehousing demand, with a projected growth rate of 30% in 2023-24.
The growth trajectory
The Indian warehousing stock is expected to reach nearly 500 mn. sqft. By 2025. Developers of warehousing facilities often aim for entry yields of 9-10% and IRRs of 18-20%.
In 2021, the Asia-Pacific region invested US$ 48 billion in the logistics and manufacturing sectors, a nearly 50% increase YoY. When compared internationally, this investment performed better than average, accounting for roughly 27% of the region’s overall real estate investment. Builders now have an entrance yield of around 7-7.5%, depending on area, land costs, etc., and an IRR of over 14%. Prior to COVID-19, the average cost of building grade A warehouses was INR 1,600 per square foot. To maintain a 15% equity IRR at a cost of land over Rs 2.5 crore per acre, rents would have to be higher than Rs 26 per square foot per month. ICRA’s sample set’s current average rent is Rs. 24 per square foot per month.
Today, that cost ranges from INR 1,800 to INR 2,000. This is due to the sharp cost increases in important commodities like steel and cement by 45-47% and 30-35%, respectively. The existing rents for Grade A facilities in important markets are becoming less viable in the face of growing expenses. From 2018 to 2021, rent growth in major storage markets was less than 3% CAGR. Most developers anticipate a correction in rents by 2023 because of rising building costs and land prices, and the upcoming new supply is anticipated to draw higher rentals.
Source: ASSOCHAM
The goal of the government’s warehousing strategy is to accelerate growth by lowering transportation and logistics costs by establishing exclusive storage zones through public-private partnerships.
Under investors’ watch
Although Tier 1 cities are the primary focus of investor attention, the growing expansion requirements driven by e-commerce and 3PL firms have resulted in the establishment of Grade A warehouses in Tier 2 and Tier 3 cities, drawing investments in these locations. This is brought about by more people using the internet, the government’s push for “Digital India,” greater disposable income, a younger population that is aware of brands, and a higher standard of life.
Institutional investors and developers like IndoSpace, ESR, LOGOS, Welspun, Blackstone, and others are investing in Tier 2 and 3 cities like Rajpura, Anantapur, Sri City, Coimbatore, Nagpur, Lucknow, Siliguri, Jaipur, Bhubaneswar, Guwahati, and others as they expand their footprints throughout the nation.
To expand their geographic footprint and increase their reach, which are fundamental differentiators in the industry, large multinational funds and businesses have invested in warehouse developers and operators. The construction of specific freight corridors and the expansion of the road and rail networks are just a few of the numerous steps the Indian government has taken to upgrade the sector’s infrastructure in order to increase connectivity and cut down on travel times.
The digital transformation of the warehousing and logistics segment has been a crucial government involvement. Additionally, the government has also announced the creation of logistics parks and warehouses around the nation in order to give businesses the right storage options. In FY23, the government is expected to spend US$ 91.4 billion on logistics advancement, multi-modal connectivity, and infrastructure. Industrial development, consolidation, and efficiency are being facilitated by reforms like the GST and e-way bills.
