Understanding Industrial Real Estate and its Significance
Why investing in Industrial real estate is profitable and how important is the growth of this sector with regards to commercial real estate? Find out more in this article.
There might be a reason why industrial real estate misses the mention often when commercial real estate is on the discussion table. Subconsciously, people might be more drawn to places they work at, live at, or buy stuff at. That covers commercial office spaces, residential, and retail spaces. In all this rush, people tend to forget where things are made - the industrial spaces. Just like warehousing is important for retail, the source of goods is as important. From that perspective, the significance of industrial commercial real estate cannot be understated. Even as an investment option, industrial real estate can contribute a lot towards growth and stability of a portfolio. It’s just natural that when the demand for goods increases, production and inventory storage growth will also follow suit, which requires more industrial space to be leased/purchased by a company. From the POV of investment, it makes sense that industrial spaces are a good bet because of the growth that they are assured of.
Many parts of Asia see industrial property as a segment with substantial potential. India has been steadily gaining traction in this segment, buoyed by the Make in India initiative. Low labour cost, affordable cost of investment are some of the reasons why industrial property picks up pace in certain regions. Additionally, favorable corporate income tax, proactive in trade agreements also help boost the growth of industrial property in markets.
Though when investing, you would normally understand if a property falls under the industrial segment or not, it is also good to understand the various subtypes of property that are included in the industrial segment.
Manufacturing Plants/Fabrication Facilities are the most common thought when it comes to considering industrial property. These factories are places where goods are assembled and produced. They can range from pure play production and fabrication to minor assembly lines where prefabricated parts are put together. They can be labor intensive or might use robotics and automation based on the need and requirement. Large and small factories generally consist of office spaces that are less than 20% of the total area occupied by the facility. In manufacturing facilities, companies still have to decide what kind of operation needs to be run from among -
Ready-Built-Factories provide tenants with flexibility on investment and financing. Along with that they also allow scalability in terms of prepared land as the business expands. They are the choice for companies who want to enter the market quickly and start operations post haste.
Built-to-Suit Factories are larger buildings, custom-made as per the tenant’s requirements and needs. Building and setting it up requires a longer time and more commitments from both the parties in terms of capital and effort. Since it is custom-built, the tenant benefits from the tailored solution but also has to sign up for a longer lease that can be up to 10-15 years or even more. This allows the landlord to recoup their investment over the duration of the lease term.
Under warehouses, the general types available are distribution, private, and flex spaces. Flex spaces can be made into warehouses and can also fit a variety of other purposes, while dedicated warehouses like distribution and private ones are meant specifically for storage and logistics purposes. Distribution warehouses house goods from the manufacturer to the distributor before they are sent across to retail destinations. These warehouses treat location to be the number one factor. Proximity to major air and sea ports, highways, et al play a major role in the value appreciation of such places. They help save money and time for manufacturers, third-party distributors, and retailers. Private warehouses on the other hand, are used mainly for storage rather than distribution purposes of perishable goods. But these have fixed size and cost and while they offer the benefit of control to their users, having them is costly from the perspective of maintenance and upkeep. Some private warehouses can come with cold storage facilities, especially if they are to deal with sensitive materials. Based on the tenant and their business, leases on such specific private warehouses can offer really good returns. But finding a new suitable tenant if the lease is not renewed might be more difficult. Data centers are spaces that are used by companies in the hi-tech industry to house resource intensive servers. These spaces are mandatorily fitted with thorough electrical connectivity, ventilation and cooling systems, they are located close to major power supply and communication lines and have a very strict emphasis on access control and security to prevent unauthorized data access.
Now that we have a general understanding of industrial spaces, let us see how the growth of industrial real estate has been over the recent past. As per a report from Colliers India, the gross leasing of industrial and warehousing space rose by 11 percent to 6.2 million sq ft across five major cities in India within the period of January to March 2022. Not to forget that these spaces are categorized Grade A by Colliers research. Nearly half of the gross absorption was led by third-party logistics players, and then followed by the engineering and automobiles sectors with a share of 17 percent and 12 percent respectively. It has also been observed that developers are looking to cater to build-to-suit demand as opposed to traditional speculative supply addition.
All things considered, the scope of industrial real estate as an investment opportunity is really favorable, going by the way the economy of India is forecasted to grow. As with every other kind of investment, it is also a prudent decision to diversify your portfolio as well, so including a bit of industrial real estate in your commercial real estate portfolio can work wonders in diversification. To understand how else you can improve your investment choices in commercial real estate through fractional ownership, take a look at www.strataprop.com.