_Logistics & Warehousing: The Return Dynamics in Indian Warehousing Sector

While the Indian Logistics sector has always held great promise, game-changing measures such as the GST and the Logistics Parks Policy taken by the Central Government definitely make it seem like an idea whose time has come. The Indian warehousing sector especially is attracting a lot of investment interest from stakeholders willing to commit long-term capital in this asset class.

June 04, 2018

The government has recently announced infrastructure status to the logistics industry. This decision will enable companies in the logistics and warehousing sector projects to access funds at lower cost, longer tenure and enhanced limits.

It would also enable them to raise larger amounts of funds as external commercial borrowings (ECB), borrow longer tenure funds from insurance companies, pension funds, and sovereign funds and also make them eligible to borrow from the India Infrastructure Financing Co. Ltd (IIFCL). Banks would be able to lend to this sector with lower provisioning requirements than earlier. The approval process also gets simplified.

Institutional players will not invest in unorganised and small warehouses; they generally invest or set up large warehouses and professionally run logistics parks.

The government has defined “logistics infrastructure” to include a multimodal logistics park. Currently, the new facilities that are being built by institutional players are generally of large sizes, bigger than the minimum requirements and hence, they would stand to benefit from the infrastructure status.

Warehousing investment accounted for around 26% of the total private equity (PE) investments into real estate during January 2014 – January 2018. Around USD 3.4 billion (INR 22,100 crore) of institutional capital has flown into this sector during this period. The actual size of capital movement would be higher, as these numbers only cover the major investments by organised players.

Earlier, due to the unorganised nature of the industry the equity IRR for a development project was low. Now with all the policy reforms that are being undertaken there is a paradigm shift in the industry structure where it is becoming favourable for organised players.

On account of this structural transformation, the attractiveness of taking up a warehouse development project is evident. Our assessment, reflected in the Equity IRR of a warehouse development project, indicates how warehousing as an asset class is becoming a lucrative avenue in the spectrum of commercial real estate development.

The rate of return for a warehouse development project ranges from 12% - 28%. Clusters like Nelamangala-Dabaspete in Bengaluru and Jeedimetla-Medchal in Hyderabad yield 12% IRR as opposed to the 28% of Chakan-Talegaon cluster in Pune.

Click here to know more: Research - India Warehousing Market Report 2018