Warehousing demand, rents witness surge amid diversified occupier base

Warehousing demand and rents across the top eight Indian cities witnessed a surge, while the segment's occupier base saw diversification, according to property consultant Knight Frank India.

 

The firm reported that between January and September 2024, about 37.5 million square feet (msf) of warehousing space was leased, representing a year-on-year (Y-o-Y) increase of 4 per cent. Meanwhile, in the third quarter of 2024 (Q3CY24), lease transactions stood at 14.6 msf, up 20 per cent, with the year estimated to end on a strong note.

 

The top eight cities are Mumbai, Pune, the National Capital Region (NCR), Bengaluru, Hyderabad, Chennai, Kolkata, and Ahmedabad.

 

Ajay Rao, founder and chief executive officer (CEO) of Emiza, a warehousing firm, said, “There is a significant amount of uptake, especially from q-commerce companies for their regional warehouses across multiple cities. We have seen massive expansion by Zepto, Blinkit, etc., in terms of their warehousing space requirements.”

 

The overall demand is attributed to growth in sectors including manufacturing, e-commerce, and logistics. Further boosting the demand are initiatives such as the National Logistics Policy (NLP), the National Manufacturing Policy, the Gati Shakti initiative, and the development of multimodal logistics parks.

 

Industry-wise, between January and September 2024, the manufacturing sector outpaced the third-party logistics (3PL) sector in transacted volumes compared to the same period last year, marking a significant shift given the 3PL sector’s traditional dominance in the Indian warehousing market. Manufacturing companies, particularly from the automotive, energy, and chemicals industries, accounted for 37 per cent of the total transacted volumes.

 

However, the retail and e-commerce industries showed the highest transaction volume growth, at 34 per cent and 35 per cent Y-o-Y, respectively. The growth is predictable, considering the booming e-commerce industry. According to a Deloitte report, India’s e-commerce market is projected to grow at a compound annual growth rate (CAGR) of 21 per cent to reach $325 billion by 2030. Meanwhile, the quick commerce (q-commerce) market size is estimated to reach $40 billion by 2030, with a higher CAGR of 45 per cent.

 

Of all the transactions in Q3CY24, 41 per cent involved Grade A spaces. According to industry experts, Grade A warehouses account for 60-70 per cent of total warehousing market demand while contributing 40 per cent of pan-India stock.

 

Grade A warehouses stand apart from Grade B and Grade C warehouses due to their compliance levels, such as fire safety norms, and building and operational efficiency. They are estimated to span over 300 msf by 2025. According to Govindraj, vacancy rates for Grade A warehouses are projected to remain below 5 per cent in the coming years.

 

Rao added that customers are migrating from Grade B and Grade C to Grade A warehouses. “We have seen Hindustan Unilever Limited (HUL) migrating to a Grade A space; now Nestlé is also moving completely to Grade A spaces,” he said.

 

Grade A warehouses offer advanced features such as insulation, FM2 flooring, electrical doors, and dock levellers, justifying a higher rate per square foot. “Therefore, they can justify a higher rate per square foot,” Rao said.

 

According to Knight Frank India, in Q3CY24, average rents for warehouses across the eight cities rose by 2.5 per cent, with Pune and Ahmedabad leading the chart with rent escalation of 4 per cent.

 

Thirumal Govindraj, CEO of RMZ Office and RMZ NXT, stated that the preference for high-quality facilities is supported by a 6 per cent Y-o-Y rise in rental rates from 2021 to 2023, driven by higher land prices and construction costs.

 

However, Rao noted that although prices have risen, current pricing levels are still lower than what is required by developers to make projects viable and highly profitable. “There is still room for expansion,” he added.

 

Substantial share in real estate investments, but challenges persist

 

According to Colliers, the industrial and warehousing segment accounted for almost half of total institutional investments in real estate during H1CY24, receiving investments of $1.7 billion, up 388 per cent Y-o-Y, led by the Reliance-ADIA deal.

 

Vivek Rathi, national director of research, Knight Frank India, said investors find warehousing properties less risky compared to office and retail assets, as they are more critical for business operations and occupier leases tend to be for longer terms. “Current market yields range between 7.5-8 per cent, depending on specifics such as location, grade, and occupier mix, while office market yields are approximately 100 bps higher. Residential yields currently range between 2.5-3.5 per cent,” he added.

 

However, Rohin Agarwal, vice-president, Avener Capital, said investors are sacrificing present rental yields with the potential to earn outsized returns from future growth in rentals, given the sector’s demand-supply mismatch.

 

As of Q3CY24, amid healthy transaction volumes and comparatively lower supply in recent times, vacancy levels stood at a robust 10.3 per cent.

 

Agarwal said, “Cap rates for recent deals are in the range of 7 per cent, reflecting over a 50 per cent reduction since 2011.”

 

Additionally, the sector faces challenges including sustainability, availability of viable land with adequate title documentation, high costs of adopting technological advances, labour issues, complex legal and regulatory processes, and connectivity issues in Tier-II and Tier-III cities.