India’s Warehousing Growth and the Reasons Behind It
India’s warehousing market is viewed as an attractive investment opportunity driven by a massive consumption market and the government’s ambitious economic growth targets. Here are the factors shaping the growth of this industry and what investors can expect.
India’s warehousing sector - one of the most critical logistics and supply chain links - has evolved from highly fragmented, unorganised storage spaces with limited to zero automation to sophisticated, state-of-the-art asset classes, garnering attention from global and domestic institutional investors.
Here are the factors shaping the growth of this industry and what investors can expect.
Decoding the Demand for Warehousing in India
India’s warehousing market is viewed as an attractive investment opportunity driven by a massive consumption market and the government’s ambitious economic growth targets.
Listed below are vital factors influencing the warehousing trajectory in India.
1. Make in India: The focus on boosting the manufacturing sector’s GDP share to 25% by 2025 and pushing the ‘Make in India’ initiative to position India as a global manufacturing and design and manufacturing hub has resulted in more interest in the warehousing market with the investment rationale holding tremendous potential.
2. Post-Pandemic Recovery: Improved vaccination rates and a better understanding of the pandemic supported a significant recovery in the general post-pandemic business environment.
- Recovering supply chains and rebounding demand by companies in FY 2022. Occupier demand rose 62% YoY in FY 2022, marking a fresh high in annual transaction volumes for warehousing in India.
- During the pandemic, warehousing and logistics earned recognition as an ‘essential services’ sector. Consequently, businesses across sectors, including third-party logistics, manufacturing, engineering and e-commerce, have made significant investments in the warehousing industry.
- NCR and Mumbai led the market in terms of overall transaction volumes for the Indian warehousing market during FY 2022. However, Pune and Hyderabad saw the most YoY increases in annual transacted volumes at 166% and 128% YoY, respectively.
Notably, occupier demand rebounded in tandem with solid rent growth across markets is another reliable sign of market strength.
3. High Inventory: Warehousing transaction volumes for the eight primary markets (NCR, Ahmedabad, Mumbai, Pune, Hyderabad, Bengaluru, Chennai, and Kolkata) are projected to grow at a compounded growth rate of 19% in the FY 2021-2026 period. In FY 2022, alone, there was a 62% growth in volume.
With businesses maintaining comparatively higher inventory levels over multiple locations, the resilience built into supply chains will help support demand and rent.
4. In-city Warehousing: With the critical need to minimise delivery timelines, the rapid growth of the e-commerce sector and the entry of big names, including the Tatas and the Reliance Group, multi storey warehouses could soon become mainstream. These multi-storey, modern facilities will serve high-population catchment areas within cities.
Besides optimising land utilisation in congested cities, multi-storey in-city warehousing will help reduce delivery timelines and transportation costs.
5. Logistics and the 3PL Revolution: The country’s thriving logistics sector has fuelled a vast range of warehousing needs. These include high-density storage, temperature-controlled warehousing, and advanced distribution centres.
As logistics providers boost capacities to match the rising demand for logistics services, warehousing is expected to expand further in the coming years. Additionally, along with e-commerce and demand for storage in Tier l and Tier ll cities, the expansion of 3PL will boost demand for warehousing in the coming years to strengthen last-mile delivery.
3PL (third-party logistics) players have been looking keenly for in-city warehouse development opportunities across Mumbai, Delhi and Bengaluru. However, high real estate costs in these locations have resulted in turnkey opportunities like factory units, defunct mills, and shuttered malls are also being looked at as options.
6. Dark Stores: A dark store is typically a warehouse that can be used to enable “click-and-collect” services, where customers collect the item they have purchased online or as an order fulfilment platform for online sales, mainly in the grocery category.
- Dark stores are a more recent format within in-city warehousing that has been gaining prominence, especially in the grocery segment, with leading e-commerce players such and maintaining these premises at urban consumption centres.
- Dark stores have helped drive sales and claim market share from traditional retail formats with their unique proposition of speedy delivery at discounted prices. The fast-increasing customer demand for this format will likely continue boosting demand for dark stores.
- The growth of dark stores in international markets supported by fast-growing demand for online fulfilment and increasingly favourable unit economics also point towards this format’s growth in Indian markets too.
7. Global Manufacturing Decentralization: The pandemic prompted global corporations to spread manufacturing, not to be overly dependent on any single manufacturing destination, i.e. China.
Subsequently, the government-launched Production Linked Incentive (PLI) scheme to attract significant investments in the mobile phone and specified electronic component manufacturing units and ten more sectors, including food processing, speciality steel, automobile components and battery storage.
Leading names such as Samsung, Foxconn, Hon Rising Star, Hai, and others have set up manufacturing plants at 111 locations across the country - indicating the potential for industrial warehousing in the country.
Among the eight key markets in India - Pune, Chennai and Ahmedabad have a significant industrial base. In addition, the warehousing market for industrial-use properties is expected to grow gradually as the government’s emphasis on boosting India’s manufacturing capabilities starts to pay dividends.
8. Multi-Modal Logistics Parks: The Ministry of State Transport and Highways (MORTH) has begun developing multimodal logistics parks (MMLP) across 35 nodes in the country. These nodes account for an estimated 60% of the country’s freight movement.
The multimodal logistics parks are aimed at serving four functionalities - freight aggregation and distribution, multimodal freight transportation, storage and warehousing and value-added services.
Logistics parks will need to offer modern mechanised warehousing space, satisfying the unique criteria of different commodities, for example, cold storage facilities, racked warehousing space and others. Moreover, mechanised handling in warehousing in logistics parks will minimise storing and handling losses.
Notable Trends in Warehousing
Issues like construction delays, rising input costs, soaring land prices, and land scarcity in strategic locations and clear titles pose a challenge for future investments. However, the overall outlook for this sector is optimistic. Industry experts expect that warehousing will continue to attract institutional investments and grow steadily.
Based on the Knight Frank report on warehousing, here are some notable trends in warehousing:
1. Occupier Preferences: Occupiers are increasingly showing a marked preference for Grade A properties that adhere to safety standards, have better contingency planning and are better geared to handle challenges in warehousing, such as those posed by the pandemic and the subsequently increased capacity requirements.
- 3PL and e-commerce players benefit from the value additions that Grade A properties provide for their supply chain operations. The 3PL sector recorded the most significant market share among all occupier groups at 29% in FY 2022.
- 31% of the total space taken up by the 3PL sector in FY 2022 was in Pune.
2. Greater Emphasis on Upgrades and Expansion: The entire supply chain depends on frictionless storage and movement of goods. Warehousing variables, including technical improvements, automation and robotic mechanisation, will transform the industry.
In order to boost leasing, the emphasis will be on upgrading and expansion in Tier I cities, new market penetration in in-city warehousing and the setting up of logistics hubs.
3. E-commerce and Retail Push for Warehousing: With consumer behaviour increasingly leaning towards e-commerce, especially in younger generations, e-commerce activity in the warehousing market is expected to gather momentum in FY 2023.
- Notably, in recent years, e-commerce players have expanded the most in the NCR markets. As a result, the market’s overall share in the e-commerce sector’s transaction pie, at 32% in FY 2022, was the highest among the eight key markets.
- As consumer demand rebounded in hard format stores, it directly impacted the retail sector’s warehousing space take-up. It spiked from 4% in FY 2021 to 11% in FY 2022 as retailers quickly added warehousing capacities to match the rapid rise in demand.
4. Industry Demand for Warehousing: The manufacturing sectors, including automobile, pharmaceuticals and electronics, have witnessed an increase in market share of total transactions, up 27% in FY 2022 from 23% in FY 2021.
India is making gains from the decentralising manufacturing in China and in conjunction with the ‘Make in India’ and the Production Linked Incentive (PLI) schemes. This has boosted the prospects of industry and warehousing in the country.
Warehousing Markets in India: An Overview
Here’s a quick snapshot of how the warehousing sector fared across the country’s key markets in FY 2022.
- Leasing volumes grew by 81% YoY.
- Grade A facilities accounted for 36% of transactions.
- Warehousing demand accounted for 92 % of leasing.
- The warehousing market records 5.9 mn sq ft leasing (an increase of 37% over the previous financial year, 2021).
- Warehousing leasing volumes are dominated by the Nelamangala - Dabaspet cluster.
- Leasing is dominated by e-commerce and 3PL tenants.
- Transaction volumes grew 44% YoY to 5.1 mn sq ft.
- Demand for warehousing remained focused in the Sriperumbudur-Oragadam sector, accounting for 69% of all the transactions for the year.
- The 3PL sector, which accounted for 35% of all transactions - was the primary force driving demand for warehousing space.
- Transaction activity in the warehousing sector surged by 128% YoY to 5.4 mn sq ft.
- The Shamshabad cluster, which is close to the airport and enjoys good connectivity with the Bangalore-Hyderabad highway, was one of the prominent warehousing clusters.
- A significant portion of the warehousing development is centred around the airport's southern side.
- 4.3 mn sq ft warehouse space was transacted, clocking in a significant 41 % YoY growth over the previous financial year, 2021.
- National Highway 16 accounted for 59% of the total warehouse space leased in the year.
- E-commerce - with a 26% share - was the top sector in the overall leased warehousing space.
- At 8.6 mn sq ft, Mumbai recorded its highest leasing volume in 6 years.
- The 3PL and e-commerce sectors together accounted for 80% of leasing demand.
- The leasing demand grew 48% YoY.
- Overall warehousing transactions rose by 32% over the previous financial year, FY 2021.
- E-commerce (41%) and 3PL (29%) were the main drivers of warehousing transaction volumes.
- The NH 48/ Kundli Manesar Palwal Expressway (KMP) accounted for a hefty 80% of the cluster-split pie of transactions.
- The city recorded 7.5 mn sq ft of leasing volumes. Most notably, this was 166% up from the 2. 8 mn sq ft in FY 2021.
- The manufacturing sector (58%) led the warehousing space take-up.
- The Chakan-Talegaon belt accounted for 86% of transactions.
Compared to developed countries, the penetration of organised warehousing in India is significantly lower. However, with the government’s concerted effort to reinforce the country’s logistics infrastructure with Multi-Modal Logistics Parks, the Indian warehousing sector has plenty of scope for growth.
In addition, with increasing institutional interest in developing, owning, and operating warehouse assets, professional expertise will play a key role in directing the course of this growing sector.
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