India continues to remain a silver lining in an otherwise turbulent global investment landscape. 2016 witnessed the country taking over from China as the fastest growing major economy. An economy which seemed to look too complicated for overseas investors given previous hiccups is gaining back investor interest thanks to a slew of steps being taken by the Government on all fronts. These include the authoritative RERA which is expected to regulate the industry, the GST which aims to simplify the way business is conducted across the country and recent relaxations on the FDI front.
Conventionally, the commercial and residential segments have dominated the investment flow in the Indian real estate space. However, the availability of commercial investment grade stock and their potential capital yields across tier 1 cities have been witnessing an increasingly diminishing return. The residential segment continues to be in the midst of a slowdown and investors are cherry picking options there. This has caused the institutional players to turn their attention towards alternative asset segments such as retail and warehousing and also turn their attention to tier 2 and tier 3 cities. The warehousing business has seen a massive amount of interest and some recent transactions include:
• Embassy Industrial Parks, a 250$ million JV between Bengaluru-based Embassy group and PE firm Warburg Pincus, has just concluded a transaction to buy 52 acres of land for Rs 60-65 crore to build a 1.1 million sq. ft. state-of-the-art warehouse in Chakan near Pune.
• Singapore-based real estate firm Ascendas-Singbridge Group plans to float a private equity fund to back warehousing and logistics parks in Indian cities. The business space solutions provider will set up logistics parks at the outskirts of major cities on land parcels spread across 50-100 acres
• Canada Pension Plan Investment Board (CPPIB) plans to invest as much as $1.2 billion (Rs 7,700 crore) in a joint venture with Indian developer IndoSpace to acquire and develop logistics facilities in the country. The IndoSpace platform has so far raised and deployed (to a large extent) $584 million across two funds to invest in building logistics parks. These include the IndoSpace Logistics Park I, raised in 2009 with a corpus of $240 million, and IndoSpace Logistics Park II, raised in 2014 with a corpus of $344 million.
• Dalian Wanda is looking to invest about $10 billlion as external commercial borrowings for developing an industrial park named Wanda Industrial New City in Haryana
• China Fortune Land Development Company Private (CFLD) is looking to fast track its plans to develop industrial parks across Haryana
Various new regulations like easing foreign investment for single-brand retailers and multi brand retail, longer shopping hours and an updated framework for establishing Real Estate Investment Trusts (REITs) have garnered the attention of various institutional like Blackstone, Xander, GIC, Morgan Stanley, towards the Indian retail real estate sector
Indian retail sector has also seen a slew of transactions in recent times. Notable ones include:
• Blackstone bought Brookfield Mall Company’s Mall in Coimbatore for INR 450 Crores
• APG Asset Management and Virtuous Retail, sponsored by investment firm The Xander Group Inc. formed a joint venture that has acquired an initial portfolio of 3 retail assets from a Xander sponsored fund in a transaction valued at ~ INR 2,000 crores (US$ 300 million)
• Xander Retail Partners – Virtuous Retail South Asia bought North Country mall in Mohali from Sun Apollo & JJ Gumberg for INR 700 Crores
• Carnival Group bought Elante Mall in Mohali from L&T for INR 1,785 Crores
• Blackstone bought Alpha G Malls in Amritsar and Ahmedabad from Alpha Corp for INR 1,600 Crores
Focus on retail is being driven by the fact that the next major cities post the metros still have favorable statistics – large urbanizing populations, rising disposable incomes, acceptance of branded products and aspirations which are no different from those in the metros. Warehousing is being driven by the availability of large tracts of land on highways outside the metros, steadily improving infrastructure and the possibility of better yields. India has occupied a remarkably high ranking in the global FDI Confidence Index 2016 retail rankings. India ranks 9th (after United States, China, Canada, Germany, UK, Japan, Australia & France) in the FDI Confidence Index, India’s net retail sales are quite significant among emerging & developed nations – the country is ranked 3rd (after China & Brazil). Lastly, transactions are also being fueled by developers cashing out on the basis of valuations, which looked very unlikely till not so long ago. This especially when some other segments like residential are still in the midst of a slowdown.
Warehousing in India has seen a massive interest on account of government reforms. With the implementation of Goods and Service Tax (GST), warehousing and logistics’ spaces will start to see a consolidation of assets. Unlike the ‘hub and spoke’ model as prevalent earlier, developers will focus on the development of large-scale, technologically advanced warehouses near demand hubs across different parts of the country. Such assets will attract private equity (PE) investors by allowing them to deploy a larger amount in fewer assets, making monitoring easier. If managed well, such assets would also attract healthy valuations at the time of monetization through REITs or other structures. The policies allowing 100 per cent foreign direct investment (FDI) in warehouses and food storage facilities under automatic route as well as declaring some zones to be tax-free have made the sector strongly re-emerge on the foreign PE investment radar.
Going forward, demand for Warehousing and logistics will continue to see massive expansion. E-commerce became the second largest driver for demand for warehousing space in India, after third-party logistics operators, which had a 30% share. ‘Make in India’ is further expected to drive demand from manufacturing, ecommerce and retail firms requiring quality warehousing spaces in a market that is highly unorganized which itself creates an opportunity. Companies operating commodity warehouses, which are a vital link in the agriculture supply chain, are looking to raise PE capital as they expand their business and create new growth verticals.