Growing Demand: Key drivers and developments in the warehousing space

Key drivers and developments in the warehousing space

The warehousing segment in India has witnessed significant developments over the years. As per JLL, despite the unfavourable socio-economic environment, the warehousing stock in the top eight cities – NCR Delhi, Mumbai, Bengaluru, Chennai, Pune, Kolkata, Hyderabad and Ahmedabad – has increased by 27 million square feet (sq. ft) to reach a total of 238 million sq. ft in 2020. The total warehousing stock of the country is expected to cross 375 million sq. ft by 2023, with an increased share of Grade A stocks. Based on industry estimates for the per unit cost of development of a warehouse (Rs 1,500 per sq. ft for a Grade A warehouse and Rs 1,100 per sq. ft for a Grade B warehouse), India Infrastructure Research expects both Grade A and Grade B warehouses to witness an investment of about Rs 170 billion by 2023.

Demand for warehouses has primarily been led by the third-party logistics (3PL) and e-commerce segments. 3PL has become one of the fastest growing segments in the warehousing space, contributing nearly 35 per cent of the total net absorption in 2020, highest among all the other sectors. Pune and Chennai have the highest concentration of Grade A stock due to the primary demand base of auto and auto ancillary occupiers, while Mumbai and Delhi-NCR have a significantly lower proportion of Grade A warehouses. Rising consumerism and the emergence of e-commerce have created a need for faster deliveries across the country. Key policy interventions and demanding occupiers have ensured a push towards institutionalisation of the warehousing segment in the country.

Government reforms and interventions

The government has introduced policy reforms and interventions to remove structural rigidities in the infrastructure sector and improve efficiencies. Generally, private sector players are reluctant to invest in capital-intensive warehouse projects, as these projects do not guarantee an attractive internal rate of return. To bridge the gap and encourage large-scale participation from the private sector in setting up warehouses, a viability gap funding (VGF) scheme has been proposed. The VGF has been designed as a one-time capital subsidy grant and a risk mitigation tool to provide assurances of guaranteed returns to private sector players and ensure their participation in projects, which might be otherwise considered as commercially unviable.

The central government is set to launch a National Logistics Policy soon. A draft policy has already been formulated by the government. The upcoming policy is expected to streamline rules and address supply-side constraints, leading to lower logistics costs and greater competitiveness for Indian products worldwide. The high logistics cost in the country has been a major concern for the industry, which also impacts the competitiveness of domestic goods in the international market. Over the next five years, the government aims to reduce logistics cost from the current 13 per cent of the gross domestic product to 8 per cent.

In a recent development, the cabinet has approved the merger of the state-owned Central Railside Warehouse Company Limited with its holding enterprise, Central Warehousing Corporation, to implement “Minimum government, maximum governance”, promote ease of doing business and bring in private sector efficiencies in public sector undertakings. The merger will promote efficiency, optimum capacity utilisation, transparency and accountability; ensure financial savings; and leverage railway siding for new warehousing capacities. In addition, at least 50 more railside warehouses will be set up near goods shed locations.

The Covid-19 vaccination drive has given significant impetus to the cold chain sector, as vaccine storage and distribution requires a robust logistics chain and a precise temperature-controlled environment. In addition, the demand for ultra-cold storage vehicles is also expected to rise as hundreds of thousands of vaccine doses at subzero temperatures will have to be transported at a spoke-to-spoke level as well as for last-mile delivery. Thus, the increased focus on cold chain in healthcare will probably double the growth metrics for the next two to three years.

Evolving role of technology

The warehousing segment has entered into a new phase of consolidation with the introduction of the goods and services tax. This has highlighted the need for a seamless integration with technologies such as robotics, artificial intelligence and machine learning. Technology penetration has been witnessed in self-managing inventory systems, self-driving forklifts, autonomous ground vehicles and other tasks that reduce manual dependency. Going forward, robots equipped with high resolution cameras, pressure sensors and self-learning capabilities can be used for collaboration with manual labour. For instance, in warehouses, these robots can be programmed to perform tasks such as picking, packing and sorting, or assist in loading and unloading goods. Amazon is a good example of the deployment of robots in managing warehouses. The e-retailer’s warehouses comprise multilevel criss-crossing conveyor belts, with many giant vacuum-like robots methodically pushing shelves of products. Warehouse management through real-time tracking tools has also been deployed within the industry.

As supply chain management assumes the function of a profit driver, instead of an overhead cost for industries such as manufacturing and e-commerce, many businesses are opting for outsourcing a significant part of their operations to warehousing companies. Just-in-time techniques have put the responsibility of maintaining optimum efficiencies on warehousing companies. With the rising requirement of automation, many start-ups have also started entering this field of automation. New innovations have led to a reduction in the cost of automation. In the near future, Indian warehouses are likely to invest more in technologies that aid business continuity. Data recovery services and cybersecurity solutions are two of them.

Organised warehousing

Organised warehousing is gaining traction on the back of rising regulatory compliance requirements and economic efficiencies demanded by new businesses. Private equity activity has been improving with the participation of a wide range of foreign investors. 3PL and e-commerce players comprise the biggest market of organised warehousing. The demand for organised warehousing in Tier II cities is rising, as user industries, 3PLs and e-commerce players are rapidly expanding in these areas, due to increasing consumer demand, low rentals and improved transport connectivity. Growth in consumption and manufacturing as well as the demand for last-mile solutions, with specialised value-added services, are driving the demand for integrated facilities, which include multi-modal logistics parks, free trade warehousing zones, industrial parks, etc.

The way forward

The annual warehousing transactions in the top eight Indian cities are expected to grow at a compound annual growth rate of 19 per cent to 76.2 million sq. ft by fiscal year 2026, as per Knight Frank’s estimates. The warehousing space per capita in India is significantly lower than that in the developed economies. With the critical business objectives that a supply chain serves, industrial and warehousing spaces have a long runway for growth. With increased automation and technology in warehouse management, the draft National Logistics Policy has given a thrust to modernising warehousing in order to reduce inefficiencies. Both e-commerce and 3PL will remain the dominant occupiers and growth is set to pick up, based on changing consumer behavioural patterns and the smaller manufacturers trying to use 3PL to gain scale and operational efficiency. A shift to the online mode of shopping, in the wake of Covid-19, is a huge positive for industrial warehousing. The warehousing industry will continue its strong growth momentum in the coming years. The industry’s shift towards an organised format and consolidation of warehouse assets are bolstering investor confidence in this space. Further, there is an increase in demand for warehousing space in Tier II cities, including Coimbatore, Guwahati, Lucknow, Jaipur and Ludhiana.