Warehousing AIFs: The next frontier of investing?

Over the last few years, we have witnessed some disruptive trends in the investing community – access to financial products is now more inclusive, innovation commands a premium, and awareness about the importance of investing is at an all-time high. This is the era of democratization of finance.

This democratization has had two subsequent consequences: while it has made certain financial products saturated and in many ways obsolete, it has given rise to a different class of innovative financial products that have the potential of tapping the previously unchartered waters of India’s vibrant economy.

Within real estate, warehousing has been one of the few sectors to have demonstrated resilience and continued growth, despite the economic headwinds brought upon by the Covid-19 pandemic. 2020’s global pandemic and the resultant lockdowns have accelerated both the scope and the pace of e-commerce adoption; facilitated by increased smartphone penetration, expansive internet data coverage, rising consumerism and the growing aspiration in Tier-II and Tier-III cities.

Any e-commerce operation needs a strong and robust supply chain network, of which, modern warehousing forms a critical component. As these global e-commerce companies rapidly look to expand in their battle for retail supremacy, investments in ancillary infrastructure like warehousing; especially well located, modern, compliant with very high construction quality; will remain a top priority. We estimate that e-commerce companies, themselves, will require at the very least 25 million sq ft of Grade-A warehousing stock in 2025 across the country which in 2020 was 9.3 million square feet.

Additionally, the government’s policies have provided a huge boost to the warehousing sector. India’s warehousing segment came into prominence in 2017 when the government implemented GST, awarded ‘infrastructure status’ to the sector and permitted 100 per cent FDI. Later initiatives like ‘Make in India’ and ‘Atmanirbhar Bharat’ contributed to the overall positive outlook in the larger manufacturing space which directly creates warehousing demand. Going forward, the National Logistics Policy, which is slated to be released soon, targeted to fast track lowering logistics costs from 13-14 per cent of GDP to 10 per cent will have a direct and positive impact on warehousing sector.

In light of the favourable demand and supply dynamics, India’s warehousing sector has already evinced significant interest from blue-chip investors globally and in India. On the institutional investment side, the sector has seen upwards of $6 billion of investment since 2017. This investment opportunity, however, has been historically confined to either institutional players or investors who are ready to own a warehousing asset. In contrast, with an AIF investment model, investors are able to reap the benefits of the development returns by owning units of a fund, instead of the whole asset itself. This opens the doors for domestic retail investors and HNIs to own a pie in the growing warehousing segment. Recently-launched wealth products like AIFs have introduced warehousing and logistics as a new asset class.

Interesting development models are also providing an added incentive to investors – developers are now identifying tenant requirements beforehand, and constructing built-to-suit warehouses to ensure cash flows. Additionally, the overall strong demand for Grade-A warehouses from sectors like e-commerce, 3PL, cold storage, manufacturing and pharma ensure a robust pipeline, make monetisation of assets feasible and the possibility of providing risk adjusted returns higher. Investors are more inclined towards warehousing owing to the shorter developmental cycles, lesser construction complexity and low construction cost in contrast to traditional real estate, whether commercial or residential. At the final stage, these revenue-earning assets, weather built to suit or built speculatively on gauging demand, are then divested to institutional and blue-chip investors, giving investors clear visibility into targeted returns as well as potential exit routes.

As the second wave of the coronavirus rips through the nation, the warehousing and logistics sector might be the one sector that will continue to see demand. In fact, the continued lockdown will only benefit the e-commerce industry, which will result into demand for more Grade-A warehousing facilities. Investors are hopeful of the warehousing segment emerging stronger from the crisis globally and institutional investors are expected to continue to acquire warehousing assets in the coming years. As investors continue to look for the next bountiful piece in the great Indian growth story, we expect a lot of interest from AIFs, REITs, and other secondary offerings for warehousing assets in the near future.

(Anshul Singhal is MD of Welspun One Logistics Parks. Views are his own)