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In the post-GST era, for a warehousing operator, investment decision will no longer be dictated by the comparative tax advantages of various states, thereby enabling them to make decisions based on supply chain dynamics, writes Anshuman Magazine, Chairman, India and South-East Asia, CBRE.

The Goods and Services Tax (GST) has finally become a reality, close to one and a half decades after it was first proposed. The journey of moving towards a single-tax system has not been particularly smooth as the GST has faced innumerable challenges ranging from its structure, tax bracket to subventions for states that may face revenue losses. However, despite the challenges and resistance, the determination of the government to implement a single-tax system across India has been consistent with the tax coming into effect on July 1, 2017. While a landmark tax like this is expected to have far-reaching implications for all sectors in the economy including real estate, there is a significant impact expected on the Industrial and Warehousing segment in the long term.

According to recent research conducted by CBRE in the global industrial and logistics space, over the next decade, nearly 20 markets worldwide are set to emerge as global logistics hubs. While the current global hubs will remain dominant in 2030, several emerging hubs are set to rise in significance, regionally as well as locally. These emerging Asian hubs include India’s Delhi NCR and Mumbai; China’s Chengdu, Fuzhou, and Hangzhou; South Korea’s Busan; and Vietnam’s Ho Chi Minh City, among others. These hubs are increasingly growing in importance due to the shift in low-end manufacturing, rising consumption power, infrastructure and policy developments.

Strong economic indicators

Strong and sustained economic growth over the past few years has led to a healthy demand for warehousing and industrial space in India. The government’s ‘Make in India’ campaign has provided necessary impetus and induced large scale investments, resulting in strong demand from the manufacturing sector. Additionally, the country’s favorable population composition, increasing disposable income coupled with an increasing focus on operational efficiency and growth of new business sectors such as e-commerce, has led to an increase in leasing of modern warehousing space. Demand for warehousing space across the country grew from an average of 4.5 million sqft per annum during 2010–12 to around 7.7 million sqft per annum in 2013–15. During the first half of 2017 alone, approximately 7.3 million sqft of warehousing space take up was witnessed across key cities in India.

As India witnesses the entry of global players across segments, there is a need for better quality of warehousing spaces which align with global benchmarks. The government’s initiatives to streamline India’s logistics ecosystem, particularly custom clearances and overall infrastructure has resulted in India ranking 35 out of 160 countries on the 2016 World Bank’s Logistics Performance Index (up from 54 in 2014).

Warehousing activity in the country in recent months was governed by the expected implementation of the GST. With the recent implementation of the tax, the Indian warehousing sector is poised for structural changes in its operation dynamics. The focus of players will now be on supply chain efficiencies which will result in consolidation of warehouses. In the long-term, this will result in increased demand for larger, better quality warehouses, thereby providing an ideal platform for the emergence of large scale nationwide players.

Gauging the impact

To gauge the impact that the Goods and Services Tax would have on India’s warehousing industry, CBRE recently conducted a survey among the leading warehousing space occupiers in the country. Survey respondents included leading corporates across sectors including third party logistics companies (3PLs), e-commerce, engineering & manufacturing, fast moving consumer durables and nondurables, pharmaceuticals and retail. Approximately 63% of respondents were domestic corporates, while the rest were headquartered abroad.

The survey threw up some interesting results. More than 63% of the respondents felt that the implementation of the GST would be positive for their overall business operations in India. The hope is that operating costs will decrease in the post-GST era which will enable them to consolidate their smaller facilities into larger ones and expand their footprint around major consumption centres.

Approximately 45% said that their cost of warehousing operations is likely to decline once the GST comes into play, while around 25% were cautious and felt that it is too early to assess the actual impact. However, the majority of respondents said that they are already prepared for the introduction of the GST and would be able to align their business to the new regulations. According to the survey, the most likely strategy for warehousing portfolios in the post GST era is that of consolidation followed by expansion. Close to 28% of respondents said they would consolidate, while 23% stated that they would further expand their operations across the country.

Close to 52% of survey respondents currently have multiple warehousing facilities in one state / city. When questioned, 28% of respondents said this is the most effective way to operate given the multiple local taxes involved. Close to 38% of companies surveyed also feel that this is the most suitable mode of operation based on their current business model. However, in the post-GST scenario, the concept of a mother warehousing hub for a region supplemented by spokes is expected to become more popular. Around 11% of companies surveyed said they would prefer to adopt the hub and spoke approach in the post-GST regime, compared to only 6% now.

While understanding respondents’preference across various states, approximately 38% of respondents said they will continue to expand their footprint across states such as Tamil Nadu, Karnataka, Haryana and Maharashtra. Approximately 27% will consolidate their operations, while 26% are likely to retain their existing footprint; however, approximately 8% would downsize existing footprint in states such as West Bengal, Uttar Pradesh and Andhra Pradesh.

Key themes governing logistics

Going forward some of the key themes that will govern India’s logistics and warehousing segment in the post GST regime are:

Demand to move beyond the obvious epicenters

Until recently, bulk of the warehousing demand was concentrated across the top three urban centers of the Delhi National Capital Region (NCR) in the North, Mumbai Metropolitan Region (MMR) in the West and Bengaluru in the South. As a significant development, 2016 was a landmark year for the warehousing segment as the share of relatively smaller cities such as Hyderabad, Chennai, Kolkata and Pune increased in the overall space take-up. Collectively, these cities leased 49% of the total space leased in 2016, as compared to only 25% during 2015. Going forward, it is likely to result in proliferation of demand and a resultant increased supply in such cities.

‘Manufacturing’ - a global & local connect

As per the Commerce Ministry of India, India will aim to reach 3.5% of the total global trade by 2020 from its current share of 2%. Also, exports, which currently contribute 7.5% of the GDP, need to be pushed further as India signs Foreign Trade Agreements with economies such as Japan, Korea, ASEAN and Singapore. As the significance of foreign trade in India’s economy increases, manufacturers/exporters are likely to benefit from the potential demand from neighboring markets such as Nepal, Sri Lanka and South East Asia. These regional opportunities could also be instrumental in driving the warehousing footprint of occupiers. Also, manufacturing, which contributed to almost 22% of the demand from the warehousing sector in 2016, is likely to receive a significant boost via the ‘Make in India’ programme. The government is aiming for increasing the share of the manufacturing sector to 25% of the GDP from the existing 17%, to bring it at par with countries such as China, where the manufacturing sector contributes to 36% of GDP and Thailand (35%). The convergence of these factors is likely to result in more robust demand for warehousing spaces.

More organised operations; inflow of formal sources of capital

As the warehousing sector moves towards a more systematic mode of operation, the sector is likely to witness the inflow of institutional funding and formal sources of capital. With the emergence of national players having larger warehouses, deployment of capital in these fewer, better quality assets is likely to become easier. However, given the fragmented and unorganised nature of the sector and limited local market expertise/instances of best practices, in majority of the cases, private equity funds have tied-up with regional developers.

Infrastructure development to allow supply chain efficiencies

As supply chains need to have a larger scale and become more agile, infrastructure development will have to respond to this need by becoming more forward-looking. The government has recognized investments in infrastructure as one of the key drivers of economic development. To fast track growth, the government has set-up the National Investment and Infrastructure Fund (NIIF), as a quasi-sovereign wealth fund with a corpus of INR 0.4 trillion. The Union Budget 2017 emphasized the importance of a multi-modal transport network to allow the complete benefits of the GST and the ‘Make in India’ programme to percolate. The government will develop 35 Multimodal Logistics Parks (MMLPs) in the country, which are expected to serve 50% of the freight movements, enabling 10% reduction in transportation costs and 12% cut in C02 emissions. The government is also working on the ormulation of a formal uniform policy for the development of MMLPs.

Disruptive innovations will drive efficiency & cost savings

While government policies and shifting demand patterns will be potent in shaping future trends, increasing technological applications will redefine the sector’s status-quo. There is already an increase in instances of e-commerce companies, 3PL players and online grocery chains utilizing information technology to manage their inventory better. The number of startups aimed at bridging the technology gap is also on the rise. Software that enables improved fleet management though live tracking of goods, RFID system for inventory identification, automated pallet storage, amongst others are being increasingly used. As clients become more demanding and the scale of operations grow, the use of technology will only increase. 

Increased adoption of new technologies

The impact of new technologies on global supply chain can hardly be overstated. The possibilities of mobile devices and apps seem endless and have made old business models obsolete. Increasing competitive pressures and the need to deliver first-class customer service, to both retain and win business, is leading to an acute need for innovation among manufacturers, retailers and 3PL providers. The resulting change in supply chain will have a strong impact on warehousing real estate. With customer service and a greater speed to market as the main driving forces behind supply chains behind supply chain innovation,warehousing occupiers will be keen to implement new technologies for the enhancement of their operations for the next few quarters.

Strong demand for large sized warehouses

Instances of large sized warehouses (500,000 sqft or more) space take-up is still very limited in India. however, with the implication of the GST, it is anticipated that the demand for large modern warehouses will only increase in the next few years. Along with the above mentioned disruption caused by technologies, the concept of ‘hub & spoke model’ is likely to gain prominence driven by operational efficiency and cost reduction. According to a recent CBRE India report on warehousing occupier strategy post-GST, the concept of multiple warehousing facilities in one state/city is expected to lose its lustre in the post-GST era, with only 30% of respondents preferring this model compared to 52% at present. These findings indicate a move towards a more mature and efficient market. Another interesting finding from the survey was that in the post-GST era, most warehousing space requirements would be driven by consolidation and expansion activity of occupiers. Close to 28% of respondents stated that they would further expand their operations across the country.

Outlook

Going forward, as operational efficiency (amidst cost reduction) becomes an overarching theme, it may have a positive impact on cost effective locations with established infrastructure facilities. The organized warehousing sector in India is still in a nascent stage of development and the GST could be the fillip that the sector needs. On the whole, the reform will be in the larger good of the sector resulting in the emergence of better quality, investment worthy assets.

WAREHOUSE LEASING ACTIVITY DURING H1, 2017
During H1, 2017, demand for logistics & warehousing space was majorly concentrated in Bengaluru (23%), Delhi NCR (22%), and Chennai (20%); Mumbai with a share of 13% was the only other city to witness sizeable transaction activity. Smaller cities such as Kolkata, Ahmedabad, Hyderabad, and Pune collectively constituted 23% of the demand during H1 2017. On a half yearly comparison, all cities observed an increase in absorption activity, barring Kolkata and Pune, wherein the transaction activity witnessed a drop.
Similarly, leasing activity was driven by strong growth in demand from all sectors, except pharmaceutical companies, which leased 20% less space when compared to H2 2016.
In H1, 2017, 75% of warehousing space was leased by 3PL companies, engineering and manufacturing & FMCG companies. The average size of space take-up increased from approximately 50,000 sqft during H2 2016 to close to 65,000 sqft during H1 2017. The number of large sized transactions (above 2,00,000 sqft) also more than doubled, when compared to H2 2016.

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