Domestic Bonds

AIF warehousing: the next frontier of investment?

In recent years, we have witnessed some disruptive trends in the investment community: access to financial products is now more inclusive, innovation has a premium, and awareness of the importance of investing. is at an all time high. It is the era of the democratization of finance.

This democratization had two subsequent consequences: while it made some financial products saturated and in many ways obsolete, it gave birth to a different class of innovative financial products that have the potential to tap into the hitherto unexplored waters of the world. dynamic economy of India.

In real estate, warehousing has been one of the few sectors to demonstrate resilience and continued growth, despite the economic headwinds caused by the Covid-19 pandemic. The 2020 global pandemic and resulting lockdowns have accelerated both the scope and pace of e-commerce adoption; facilitated by increased smartphone penetration, extensive internet data coverage, growing consumption and growing aspiration in Tier II and III cities.

Any e-commerce operation needs a strong and robust supply chain network, of which modern warehouses are an essential part. As these global e-commerce companies rapidly seek to expand in their battle for retail supremacy, investments in ancillary infrastructure such as warehousing; particularly well located, modern, conforms to a very high quality of construction; will remain a top priority. We estimate that e-commerce businesses themselves will need at least 25 million square feet of Class A warehousing inventory by 2025 across the country, which in 2020 was 9.3 million square feet. .

In addition, government policies have significantly boosted the warehousing industry. The warehousing segment in India took a prominent place in 2017 when the government implemented the GST, granted “ infrastructure status ” to the sector and allowed 100% FDI. Subsequent initiatives such as “Make in India” and “Atmanirbhar Bharat” have contributed to the overall positive outlook in the larger manufacturing space, which directly creates the demand for warehousing. In the future, the national logistics policy, which is expected to be published soon, aimed at rapidly reducing logistics costs from 13-14% of GDP to 10% will have a direct and positive impact on the warehousing sector.

In light of favorable demand and supply dynamics, the warehousing industry in India has already garnered considerable interest from blue chip investors globally and in India. On the institutional investment side, the sector has recorded more than $ 6 billion in investments since 2017. However, this investment opportunity has historically been limited to institutional players or investors willing to own a storage asset. In contrast, with an AIF investment model, investors are able to reap the benefits of development returns by owning units of a fund, instead of the entire asset itself. This opens the door for domestic retail investors and HNIs to own a pie in the growing warehousing segment. Recently launched wealth management products like AIFs have introduced warehousing and logistics as a new asset class.

Attractive development models also provide an additional incentive for investors – developers now identify tenant needs in advance and build custom-designed warehouses to secure cash flow. In addition, the overall strong demand for Category A warehouses from industries such as e-commerce, 3PL, cold storage, manufacturing and pharmacy ensure a strong pipeline, make asset monetization feasible and the ability to supply higher risk-adjusted returns. Investors are more inclined to warehousing due to shorter development cycles, lower construction complexity, and low construction cost compared to traditional real estate, whether commercial or residential. At the final stage, these income-generating assets, designed to adapt to weather conditions or built speculatively on the assessment of demand, are then sold to institutional and blue-chip investors, giving them clear visibility. on targeted returns as well as potential exit routes.

As the second wave of the coronavirus tears the country apart, the warehousing and logistics sector may be the only sector that will continue to see demand. In fact, maintaining the lockdown will only benefit the e-commerce industry, leading to demand for more Class A warehousing facilities. Investors hope the warehousing segment will emerge stronger from the market. the global crisis and institutional investors are expected to continue to acquire warehousing assets in the years to come. As investors continue to seek out the next abundant element in India’s great growth story, we expect a great deal of interest from AIFs, REITs and other secondary offerings for warehousing assets in one. near future.

(Anshul Singhal is Managing Director of Welspun One Logistics Parks. The views are his)