COVID-19 pandemic opens up investment opportunities in logistics sector
Since 2017, the sector has attracted interest from multiple large institutional investors, with investment inflows of Rs 278 billion. Between 2017 and H1 2020, the sector garnered a considerable 17% share of total private equity real estate investment, according to a research by Colliers
Over the past few years, the Indian market has attracted capital for income-generating real assets such as office or industrial space or infrastructure assets. India’s competitiveness and growth in infrastructure and increased government focus have created an ecosystem to build and grow businesses in India. This is also expected to drive the growth of the logistics sector in the country.
The government is also expected to release the national logistics policy soon that aims to promote seamless movement of goods across the country. The policy is in its final stages and will need approval from the Union Cabinet. The aim is to reduce the logistics cost from 13 percent of the country's GDP at present to 8 percent in five years.
A comprehensive institutional framework is also on the cards to ensure that the goals of the policy are achieved. A National Logistics Council (NLC), Central Advisory Committee on Logistics (CACL) and an Empowered Group of Secretaries (eGoS) are planned for effective coordination and implementation.
Indian market is likely to witness Industrial REITs in the next 3-5 years, with large players consolidating and creating a sizeable portfolio. With office REITs successfully launched in India, industrial REITs will soon be a reality and will provide significant confidence to the global and India investors.
The logistics sector is proving to be more resilient than other real estate asset classes during the pandemic with a major shift in consumption, resulting in an increasing need for warehouses across the country that are more technology-friendly with increased automation usage, Internet of Things, etc.
With a shorter cycle for investment compared to other real estate asset classes and visible exit mechanisms (with three successful office REITs in India), investors' investment opportunities remain available across various development and capital stages at risk in the business.
The possibilities for investors to partner at the land acquisition stage (assuming all risks clearances, development, leasing) could see a cycle of investment of 3-5 years and expected returns of 18-20 percent; this is likely with a strong local partner. Investors also look at entering after the land acquisition/clearances stage with limited risks, and hence returns could be in the range of 11-13 percent.
Further, there is an opportunity to invest in operating logistics parks/ warehouses, evolving with several operating assets now in the business. Operating assets will provide investors with a sustainable income in higher single digits.
With changing global supply chain dynamics, India is now standing at the brink of a new industrial growth wave. Firms are looking to adopt various technologies, including automation, machine learning, and artificial intelligence, to enhance productivity in their manufacturing and engineering set-ups. The changes in geopolitical dynamics have accelerated the global supply chain rebalancing with firms looking for an alternative to existing manufacturing.
India, among other Asian countries, is very well positioned to gain the share of manufacturing. The Indian manufacturing sector accounts for less than 20 percent of the GDP, and with the existing situation, the share likely to increase to 25 percent in the next three years with a strong focus on the Make in India program with the Central government and various state government signing MOUs with large global firms (such as Tesla, Apple, etc.).
There have been several initiatives such as Atmanirbhar Bharat, Sagarmala, Bharatmala, and the creation of multiple industrial corridors, creating infrastructure to attract Industrial development.
The logistics sector in India has largely been associated with fragmented sheds and godowns till the past few years. Over the past few years, certain players (like Indospace, ESR) have created a pool of Grade A warehouse assets across locations. Large institutional partnerships have supported this with investors such as CPPIB, Warburg Pincus, GIC, and large Players.
Since 2017, the sector has attracted interest from multiple large institutional investors, with investment inflows of Rs 278 billion. Between 2017 and H1 2020, the sector garnered a considerable 17 percent share of total private equity real estate investment, according to research by Colliers.
The segment’s share of total private equity real estate investment in India has been increasing year-on-year since 2017. With an influx of e-commerce activities, third-party logistics (3PL), increased use of cold storage facilities, the industry is becoming more and more organised. The creation of last-mile fulfilment centres for timely deliveries and disruption in the supply chain and production is also leading investments in this sector.