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Warehousing has become a hot segment, with a host of listed realty firms planning to expand into the space. Brigade Enterprises Ltd, Macrotech Developers Ltd (Lodha), Prestige Estates Projects Ltd, and The Phoenix Mills Ltd are some examples.

“In an emerging trend, real estate developers are foraying into the warehousing segment. Building a warehouse is an extension of their existing business of developing properties, but different companies may have different objectives to fulfil heading into this vertical," said Mohit Agrawal, analyst, IIFL Securities Ltd. Lodha is developing a warehouse on land at Palava (Dombivli) and this should help improve return ratios for the company, Agrawal said. Brigade is looking at greenfield expansions for warehousing. Mall developer Phoenix Mills said in its Q1FY23 earnings call that it has allocated 170-200 crore for warehousing on a pilot project basis.

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Warehousing can be the ideal choice for developers with large land banks where development of residential or annuity projects may not be lucrative. Monetizing land parcels at such locations may take long. Instead, if a warehouse is built, it would aid cash flows via rentals. Entry barriers to warehousing are lower than for commercial real estate, analysts said.

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“For real estate companies, generation of cash flows is a crucial monitorable. Cash flow generation for a warehousing project may be lower than for a residential project, but it is better than keeping the land parcel idle," said Abhishek Lodhiya, lead analyst at Yes Securities Ltd.

The demand for grade A warehouses is expected to improve, aided by the rise in e-commerce and quick commerce businesses in India. Property consultant JLL India estimates the warehousing market will record the highest-ever net absorption at 42.5 million sq ft by December-end. Consequently, vacancy levels, especially at Grade A warehousing spaces, will fall. Even so making a mark won’t be a cakewalk for newcomers because getting land parcels at strategic locations, which is key for competitive rentals, can be a big challenge.

“The demand outlook is robust, but the picture is not all rosy. Prices of land have been on the rise over the last two quarters. Developers who were in a wait-and-watch mode are now expanding capacity, so new entrants might have to evaluate emerging markets as opposed to established markets to have competitive edge to beat existing companies," said Shyam Arumugam, managing director - Industrial & Logistics Services, Colliers India. Getting aggregated land parcels with clear title is the major challenge faced by new entrants, he said. Another challenge is getting timely approvals related to the many aspects of a warehouse, he added. A vast presence of unorganized warehouse developers also means that huge consolidation may not happen overnight. Additionally, even as warehousing rentals have started to improve recently, the uptick has been gradual. Besides, rentals have been hovering within a range.

“Rental incomes in warehousing segment do not see steep revisions frequently. They are capped to a certain extent," said Lodhiya. Second, for vanilla warehouses, customers generally do not agree to pay high rent, as that impacts their overall cost of selling, he said.

Warehousing looks enticing to realty companies now, but given the potential risks, companies need to be watchful of over-leveraging their balance sheets when diversifying into this asset class. Most realty companies have been able to reduce their debt post the coronavirus outbreak. In the near-term, investors in realty stocks should monitor the impact of rising home loan rates on the residential sales trajectory.

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