USD 10 bn and counting – factors driving global investments into India modern warehouse

Mumbai known to many as the ‘City of dreams’ or ‘Financial capital of India’ is quietly earning itself another moniker as the largest warehouse market in India- the city possesses over 25% capacity of India’s top 8 warehouse markets. However, when it comes to the annual demand, it’s not just Mumbai but the other primary markets in India like National Capital Region (NCR), Chennai, Kolkata, Bengaluru, Pune, Ahmedabad and Hyderabad witnessing a similar robust demand.

This is making the modern warehouse demand in India more broad-based and fundamentally solid- infact annual demand has already surpassed pre-Covid levels. In addition to the above top 8 Indian markets, Tier 2 Indian cities have also seen demand soaring from highly reputed MNCs and Indian businesses, as these companies continue to expand their footprint into these Tier 2 cities aided by their consumption power and large demographic advantage.

As a result, the demand share of Tier 2 cities have been rising consistently over the past few years and the modern warehouse sector has been a key beneficiary of this growing trend, providing these businesses with the critical infrastructure to expand and conduct their operations on. This inturn is driving the economy of these Tier 2 cities – and that is ultimately contributing towards the storied rise of India’s overall GDP. No wonder then, that India’s modern warehouse infrastructure sector has witnessed massive investment flows from global investors – USD 10 bn plus in the previous 10 years alone – and continues to grow.

So what’s driving these massive investment flows?
To answer that we remind ourselves of Economics 101 – Demand (ie. the underlying demand from MNCs and renowned Indian companies for these modern warehouse assets.) Also, what’s immensely encouraging is the depth of this demand, spread well across India- well beyond the Tier 1 cities into Tier 2 cities like Jaipur, Lucknow, Indore, Surat, Bhubaneshwar, Guwahati, Coimbatore among others across the country resulting in the rising rent, increasing asset efficiency through rising occupancy levels.So what are the key factors driving this immense demand? Let’s look into them more deeply to understand the rationale for these investment flows into the sector. It is important to note that the following factors are combining at an opportune time, to provide an enabling ecosystem (rather than a singular reason) of factors for modern warehouse infrastructure growth – that’s providing a solid impetus for growth that’s sustainable for the long term.
Policy thrust
This remains one of the major boosters for this sector to flourish the emphasis on policy incentives, both at Centre and at various State government levels, in assuring asset-quality comfort for stakeholders as well as enabling benchmarks with global standards- impacting demand of modern warehouse infrastructure assets.
The Government’s recognition of ‘Infrastructure’ status to the Logistics sector, initiatives like the National Logistics Policy, Production Linked Incentive (PLI) Scheme, Goods and Services Tax (GST), National Industrial Corridor Development Programme, Bharatmala are proving to be a strong catalyst for demand growth. As per a recent Government of India press release, the PLI scheme is responsible for a 76% increase in Foreign Direct Investment (FDI) in the manufacturing sector from USD 12.09 bn in FY21 to USD
21.34 bn in FY22.

Global competitiveness in Indian manufacturing and global supply chain
India’s rising share of the global supply-chain network and an increasing number of MNCs setting up their manufacturing capabilities in the country have given a solid impetus to modern warehouse demand. The MNC giants also attract a broad ecosystem of foreign company vendors who set up their light-manufacturing functions around their MNC customers to serve them better, thereby multiplying demand for modern warehouse infrastructure. Recent forays that include, one of Apple’s biggest contract manufacturer Foxconn’s recent 300 acre land-acquisition in Bengaluru, global chip major Micron’s announcement to set up a chip assembly, testing, marking and packaging (ATMP) facility in Gujarat are some of the recent examples of how India is making steady strides into global manufacturing competitiveness, thereby driving demand for modern warehouse infrastructure sector.
Improving road connectivity and network Continued rising road connectivity as well as quality of road infrastructure is providing a timely impetus to the modern warehouse infrastructure sector. Also key policies and more importantly, their execution at round level are driving this growth. National Industrial Corridor Development Programme is developing various industrial corridors across the country that will sustain manufacturing activity and includes key projects like Delhi-Mumbai Industrial Corridor, Amritsar Delhi-Kolkata Industrial Corridor, Chennai-Bengaluru Industrial Corridor, Bengaluru-Mumbai Industrial Corridor among others that forms part of National Infrastructure Pipeline.

Additionally another key policy initiative, Bharatmala Pariyojana (BMP) aims to build or upgrade a planned network of national highways while providing better connectivity to various industrial corridors. More than 7000 km has been completed under BMP Phase 1, while Phase 2 envisages to complete 5000 km that includes expressways like Pune-Bengaluru, Indore-Mumbai, Chennai- Tiruchirappalli, Kolkata Kharagpur among its key projects in Phase 2. This increasing connectivity as well as better quality of highway infrastructure is making demand for the modern warehouse sector more deeply entrenched in Tier 1 and 2 cities and at the same time, adding to the long term stability of the sector.

Technology and innovation
From catering to mere storage and delivery functions, modern warehousing today is also about speedy and accurate delivery i.e. increased efficiency. Therefore, technology and innovation are playing a crucial role from automated storage and retrieval systems, robotic packing arms to Internet of Things (IoT) devices like sensors, RFID tags providing real time data on inventory levels, product movements to software tools like transportation management systems- all enabling quicker decision-making, reducing lead times and greater efficiency. This is leading to an increasing demand-shift from unorganized assets to organized, high- quality modern warehouse infrastructure in India.

Rise of specialised players
Third Party Logistic(3PL) providers have been significant demand-drivers of the modern warehousing sector- infact the 3PL industry has contributed over 30% of the total modern warehouse demand, consistently over the past few years. Key reasons for this rising trend of shift from captive warehousing to outsourcing include their client-companies’ focus on core operations compared to storage and fulfillment, achieving speed and agility during market expansion and inventory stocking, remaining capital-efficient while expanding their respective market reach.

Additionally, the Direct to Customer(D2C) businesses in India have also given a fillip to the 3PL industry, that’s projected to become a USD 53.02 bn industry by 2028 from an estimated USD 37.3 bn in 2023 as per a report by Mordor Intelligence. As a result, the 3PL industry in India comprises of global MNC majors as well as reputed Indian companies- and they have been at the forefront of technological innovation, driving global standards as well as expanding geographies from Indian Tier 1 into Tier 2 and even Tier 3 city-markets – all that bodes well for India modern warehousing’s depth of demand.

India’s online-commerce surge
The growth of online commerce has been synonymous with the growth of the modern warehouse infrastructure sector and is a vital cause of demand for this sector. Online commerce includes general e- commerce companies as well as specialized online retailers (for example- in furniture, grocery, medicine categories etc). The modern warehouse industry provides a critical component of the infrastructure platform for the operations (including storage, fulfillment and distribution etc) of online commerce companies. More so, online commerce requires a network (rather than a single asset) of modern
warehouse infrastructure to enable the reach and distribution of a single package- thereby multiplying the need and therefore demand for modern warehouse infrastructure assets. This is driving the robust growth of this infrastructure sector across India beyond Tier 1 cities into Tier 2 as well as Tier 3 cities.

Moreover, the adoption by customers of online commerce has also prompted several physical-only retailers to run an omni-channel operation that includes online commerce, thereby driving further the robust demand growth of these critical infrastructure assets. Therefore as online commerce penetrates deeper into India- Indian e- commerce market is expected to grow at 27% CAGR to reach USD 163 bn by 2026 as per report by Redseer Consulting- the long term growth for modern warehouse infrastructure sector promises to be inspiring.
Therefore as we see from above points, several factors are combining together at an opportune time for India’s modern warehouse infrastructure sector to enable a solid long term, led by demand increase, cashflow growth as well as volume expansion.

It is no wonder that the sector has attracted the attention of several global investors, from across the world(rather than a particular region) as well as domestic investors, that are translating into massive investment flows into the sector- not only given the above ecosystem of key factors enabling this growth, but also because of the criticality and need of this infrastructure sector to India becoming the third largest economy in the world. Going by yet another moniker of Mumbai aka “Bollywood” one might say “picture abhi baki haay dost (the best is yet to come)”.

The author is Managing Director of Omkarm Capital.

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