Warehousing has become a hot segment, with many listed realty companies planning to expand into the space. Brigade Enterprises Limited, Macrotech Developers Limited (Lodha), Prestige Estates Projects Limited and The Phoenix Mills Limited are some examples.
“In an emerging trend, real estate developers are entering the warehousing segment. Warehouse construction is an extension of their existing business of developing properties, but different companies may have different objectives to pursue in this vertical,” said Mohit Agarwal, analyst, IIFL Securities Ltd. in Lodha Palava (Dombivali). is developing a warehouse on the land.) and this should help improve the return ratio for the company, Agarwal said. Brigade is looking at greenfield expansion for warehousing. Mall developer Phoenix Mills in its Q1FY23 earnings call I said that he has allotted 170-200 crores for warehousing on pilot project basis.
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Warehousing can be an ideal option for developers with large land banks where the development of residential or annuity projects may not be attractive. It may take a long time to monetize land parcels at such places. Instead, if a warehouse is built, it will aid in cash flow through rentals. Analysts said the entry barriers for warehousing are lower than for commercial real estate.
“For real estate companies, cash flow generation is an important 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 Lodhia, principal analyst at Yes Securities Ltd.
The demand for Grade A warehouses is expected to improve, aided by growth in e-commerce and accelerated commerce businesses in India. Property consultant JLL India estimates that the warehousing market will register the highest net absorption at 42.5 million sq ft by the end of December. As a result, the vacancy level, especially in Grade A warehousing spaces, will decline. Yet it will not be easy for newcomers to make a mark as getting land parcels at strategic locations, which is crucial for competitive rentals, can be a major challenge.
“Demand outlook is strong, but the picture is not entirely good. Land prices have been rising for the last two quarters. Developers who were in wait-and-watch mode are now expanding capacity, so new entrants may have to evaluate emerging markets as opposed to established markets to beat existing ones,” said Shyam Arumugam, Managing Director – Industrial and Logistics Services, Colliers India. Obtaining consolidated land parcels with clear title is the major challenge before the new entrants, he said. Another challenge is to get timely approvals related to several aspects of a warehouse, he said. A huge presence of unorganized warehousing developers also means that massive consolidation cannot happen overnight. Additionally, even though warehousing rentals have started to improve recently, the upward trend is slowly moving. , the rental is hovering within a range.
“The rental income in the warehousing segment is often not heavily revised. They are limited to some extent,” Lodhia said. Second, for vanilla warehouses, customers usually do not agree to pay higher rents, as it affects their total cost of sales, he said.
Warehousing now looks attractive to realty companies, but given the potential risks, companies need to be careful not to over-leverage their balance sheets while diversifying this asset class. Most of the realty companies have been successful in reducing their debt after the outbreak of Coronavirus. 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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