Prateek Jhawar, director and head of infrastructure and real assets investment banking at Avendus Capital, comments on the factors driving investor interest in industrial warehousing, a space which has seen institutional investors such as pension and sovereign wealth funds commit a few billion dollars in the last couple of years. Edited excerpts from an interview:
The last couple of years have seen several platforms being set up to develop and own warehousing assets. What has driven this investor interest?
The key trigger for the institutional interest in the sector is the new demand for Grade-A warehouses triggered by the consolidation of assets due to implementation of GST, industrial sector boost and third party logistics players looking to scale up and rationalize their multi-geography presence. The sector offers yield returns, but what was lacking in the country, until about a few years ago, was the participation by yield investors who could play this sector at a much larger scale. Now that these investors have entered India, the sector has gained prominence.
How big is the market opportunity?
The sector is witnessing a rapid shift, from being dominated by unorganized players creating sub-grade assets to organized players creating Grade A assets. We think that there is a current demand of >200 million sq. ft of Grade A assets in India. With the current supply of ~65 million sq. ft, the industry is clamouring for massive developments, attempting to build the 135+ million sq. ft deficit in just 3-4 years. This effectively boils down to developing about 50 million sq. ft per year—a colossal challenge, but also an extremely lucrative opportunity.
In terms of customers, which sectors are driving the demand for these warehousing assets?
We can segregate this demand into two main categories—(i) demand for storage spaces (ii) demand for small manufacturing/industrial units. The major portion of the demand for storage spaces is driven by the burgeoning e-commerce sector. Flipkart and Amazon are taking large spaces across India to set up distribution centres. Many third party logistics players are increasingly expanding operations pan India and thereby leasing spaces across the country. The second category of demand is led by manufacturing and automobile/auto ancillaries sectors. Major players in the warehousing sector are increasingly developing Built to Suit (BTS) units for customers with specific manufacturing needs. And even these customers are spending capital on the warehouses to meet their requirements and hence signing long-term leases with the warehousing companies.
Are we seeing equal interest from both financial and strategic investors?
Deployment of warehousing assets is capital intensive and requires sustained support from financial investors. Investors such as Morgan Stanley, Warburg Pincus, Allianz, CPPIB and CDPQ have invested directly in the Indian warehousing sector by acquiring assets or by investing in India focussed platforms. A similar set of financial investors are also invested in large global platforms such as ESR and LOGOS who are investing in India.
Participation from Strategic investors has come mostly in the form of operational assets already owned by them or in the land banks available with them. Since the sector targets yield returns, financial investors are expected to lead the investments and developers can focus on churning their capital from one asset to another. The other way in which strategic investors have been participating in the sector is by contributing towards land acquisition and construction capabilities—therefore we have seen financial investors form platforms with strategics such as Embassy Group and Assetz Property Group.
What is the likely exit strategy for these platform investments? Is REIT a viable exit option?
As platforms reach an optimum scale, they will seek to monetize their assets through strategic sale or REIT listing. REIT is an efficient vehicle for holding such assets, but for it to become viable in India for the warehousing sector, we will need to wait for a yield compression in the commercial asset class. Commercial asset class commands yields that are lower by 100-150bps vis-à-vis Industrial warehousing asset class. Considering the yield of listed Indian REIT that holds commercial assets, it may not yet be viable to monetize the assets through REIT.
Most established platforms look to grow organically as well as inorganically to diversify their tenant and geographical risks. This will offer exit opportunities through asset sale as well and is the prevalent theme in Indian market currently.