While the office sector leads the pack in the private equity market in terms of realty assets, warehousing is in second position in terms of inflows as demand for warehousing remains robust.
PE investors are targeting various sub-sectors within the warehousing market, including e-commerce logistics and third-party logistics facilities. Among them, global investors have majorly been the ones investing in warehousing, even as the corpus is mostly lower apart from one or two big-ticket deals in the segment.
Large deals, which are more than 1 lakh sq ft, accounted for about 72% of the demand so far in 2023, according to data by Colliers. Office assets saw moderation in inflows during the period, but residential and industrial and warehousing segments witnessed a rebound, accounting for about 78% of the total investment volume.
Among the various realty asset classes, the industrial and warehousing segment witnessed inflows of over $690 million this year so far, the data showed.
The Capital Value Factor
There has been considerable growth in inflows in the warehousing segment due to multiple reasons, be it booming e-commerce, increased adoption of online shopping by customers or government focus, according to analysts.
"Warehousing and logistics segments carry a relatively lower investment corpus as against other segments in the real estate sector, but if we look just at these segments in isolation and do a YoY comparison, we can observe consistent growth trends since 2020, with recent YoY increase of 44% for the year 2022," Vijay KR, partner at Deloitte India, said.
Unlike other real estate segments where capital value per square feet are high, the capital value is just a fraction in warehousing.
"Warehousing is a difficult sector to scale up and deploy large quantum of capital, primarily because of the huge land acreage requirement," Jayant Menon, partner-deals at PwC India, said. "Majority of these land parcels do not stand the test of title diligence, which is required for institutional capital."
While commitments are being made, actual deployment of this capital is not that easy. Grade 'A' warehouses are the need of the hour and will need patience to create a profitable business out of it, according to Menon.
Demand Outlook
The demand for warehouse space is expected to continue growing in the next few quarters, as e-commerce and logistics companies expand their operations. This is likely to drive an increase in PE investment in the warehousing sector in the future.
"Demand outlook from 3PL players remains positive in the medium-term," Vimal Nadar, head of research at Colliers India, said. "Key government policies and infrastructure developments, including multimodal logistics parks, Gati Shakti programme, National Logistics Policy will be instrumental in institutionalising the sector while (there are) opportunities galore for investors and developers."
According to Menon, it would be better to go with tried and tested asset managers, who have a demonstrated track record of generating superior returns. Real estate investment trusts for office and retail, and infrastructure investment trusts for warehouses are much more developed frameworks with high levels of corporate governance.
"With the rising interest rate scenario, availability of capital would be difficult for (the) warehousing sector, as the inherent yields and project IRRs (internal rate of return) are very low," he said.
What HNIs, UHNIs Prefer
"While a few global players are investing into data centres, warehousing, and SEZ, we see the trend in residential plotted development, villa projects, and holiday/second homes," said Sunil Rohokale, chief executive officer of ASK Asset and Wealth Management.
Ultra-high-net-worth individuals and family offices are investing in India's real estate market through alternate investment funds, and their focus is on private equity, high-yield credit, performing credit investments in self-liquidating mid-income, affordable and mix-use residential segment.
"UHNIs and HNIs are increasingly investing in weekend homes or private villas, usually as an investment option or simply to have a vacation house built in the peripheries of cities... plotted developments create immediate liquidity for developers," Rohokale said.
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