The introduction of the goods and services tax (GST) has helped in bringing uniformity to the warehousing sector and as a result bigger organised players are getting a major play in it. The other factor propelling sector growth is the growing number of e-commerce and new-age companies and their need for technically sound warehousing and logistics facilities across key Tier I and Tier II cities. As per Colliers Research, since 2017, the warehousing sector has seen investments of around $3.6 billion, and this is expected to touch $7 billion by 2021, as existing players expand their portfolios and new ones enter the market.
Mergers and acquisitions
Merger and acquisition (M&A) activity in the cold chain and warehousing space is driven by the quest for inorganic growth as players are looking to expand their footprint in the country. The bulk of the investment in the storage sector has been in warehousing assets. The increasing demand for large warehouses from end-user industries and rising technology adoption has made these assets lucrative for developers and investors. Real estate investment trusts (REITs) are emerging as a viable proposition to monetise warehousing and logistics assets. Interest among foreign investors, including soverign wealth funds and pension funds, is rising in this asset class due to stable and high returns. Last year, the Welspun Group acquired a majority stake in One Industrial Spaces, an integrated real estate fund focused on the warehousing sector, for an undisclosed amount. The acquisition also marks Welspun’s entry into the industrial warehousing market. Post the acquisition, One Industrial Spaces has been rebranded as Welspun One Logistics Parks. This reflects the rising interest of real estate developers in foraying into the warehousing industry.
Venture capital funding in the agri-tech space
In the past few months, the adoption of the farm-to-fork model has seen an uptick in the country. The high potential in the agri-tech space has attracted venture capital (VC) funding. The COVID-19 outbreak has further expanded the scope of farm-to-fork interventions in the food grain supply chain. As per VC tracker Tracxn, agri-tech funding picked up momentum in 2017, with $71 million being invested. This jumped to $145 million in 2018 and $266 million in 2019, which is over 10 times more than the paltry $24 million invested in 2016 and $23 million in 2015. Sequoia Capital, Accel, Tiger Global, Qualcomm, Nexus, Omnivore and Lightbox have become active investors, drawn by the possibilities opening up with smartphone usage in India’s massive agrarian sector.
Upcoming opportunities for investors
The government is planning to roll out new guidelines for the construction of silos by doing away with the mandatory requirement of having railway connectivity next to the storehouses. The new model will follow the hub-and-spoke system and facilitate the construction of stand-alone silos. The government is also considering the construction of silos on a public-private partnership (PPP) model. While the Adani Group, a private player, does have a presence in the silo storage segment, the government’s proposed guidelines, once implemented, will attract other private investments as well.
The bulk of the country’s cold storage facilities are owned by the private sector. An investment of Rs 160 billion-Rs 210 billion is expected to flow into the cold chain industry between 2019 and 2023, as per CRISIL. About 90 per cent of this is expected to go towards multi-commodity cold storages. These offer higher rentals as compared to single-commodity cold storages, and also have shorter payback periods. Most of the organised players will see growth in this sub-segment, which is also seen as a potential opportunity for private equity (PE) investors. With real estate and PE firms targeting different parts of the temperature-controlled warehousing business for investment, a new partnership pattern is beginning to emerge within the industry wherein real estate companies tie up with a PE fund for investing in cold storage facilities.
The warehousing industry will continue its strong growth momentum in the coming years. The industry’s shift towards becoming more organised and consolidation of warehouse assets is bolstering investor confidence in the space. Further, there is an increase in demand for warehousing in Tier II cities such as Coimbatore, Guwahati, Lucknow, Jaipur and Ludhiana. To leverage the potential of this asset class, more partnerships between investors and developers are expected going forward. With the implementation of GST, developers will focus on the setting up of large-scale, technologically advanced warehouses. Such assets will attract PE investors since they can invest higher amounts in fewer assets, making monitoring easier. If these assets perform well, they could fetch a better valuation when monetised through REITs.
Policies and reforms open up a slew of opportunities
- Agricultural infrastructure: Under the economic stimulus package unveiled in May 2020, a financing facility of Rs 1 trillion will be provided for funding agricultural infrastructure projects at the farm gate and at aggregation points. This will provide an impetus to the development of farm gate and aggregation points and viable post-harvest management infrastructure. At present, the lack of an adequate cold chain and post-harvest management in the vicinity of the farm gate is resulting in gaps in the value chain.
- Connectivity: Under Budget 2020-21, the government proposed the launch of Kisan Rail and KrishiUdaan for a seamless national cold supply chain for perishables. The thrust on creation of cold chain infrastructure is expected to garner interest of both investors and developers.
- Warehouses: In this year’s budget, the government proposed the provision of viability gap funding (VGF) for the creation of efficient warehouses on a PPP basis. The government will provide VGF for setting up these warehouses at the block/taluka level where states provide the land. VGF will also incentivise private participation in the agricultural warehousing segment.
The government’s intent of ramping up cold storage capacity and constructing modern silos is a big positive for the storage segment. A national cold storage chain, as proposed by the government, also bodes well for the cold chain industry. The amendments to the Essential Commodities Act are expected to prompt large-scale investments in warehouses, silos and cold storages, and create more markets to sell produce. Farmers will no longer be bound to sell their crops in mandis at predetermined prices. They can instead sell their produce directly at farm gates, factories, warehouses, silos or cold storages, free of commissions, and to anyone.
The entry of yield investors in the Indian real estate market is becoming a source of great comfort for warehouse developers as it indicates a clear exit route that can be taken. As portfolios reach an optimum scale, these players will seek an exit within three-five years, either through sale to strategic investors or REITs. Moreover, the setting up of warehouse platforms is also a highly attractive venture for developers with pan-India businesses operations. With many states now equipped with a logistics policy, the approval process has also become faster and investors are now taking a long-term view of the warehousing sector as a yield play.
The multifold increase in demand from e-commerce players over the past three years has raised the demand for industrial warehouses. A strong digitalisation drive, greater internet penetration, and increasingly tech-savvy consumers are pushing growth in the e-tailing sector. This is expected to result in the e-commerce industry gaining a significant market share in the warehousing space over the next decade, further driving investment opportunities.