Warehousing India - Can Tier 2 & 3 Cities Continue The Upswing?

WRITTEN BY: SIDDHART GOEL Senior Director-Research Colliers International

How have tier 2 & 3 cities seen their markets grow?

•  Market was seeing consolidation post GST and pre-Covid-19 pandemic.
• In order to create, identify or benefit from opportunities in cities such as Ahmedabad, it is important to deliver Grade A facilities in prime locations within the right time frames.
•  Tier 2 & 3 cities will largely see demand for smaller facilities at cheaper rents that the major metros.
•  The answer to ensuring viability of smaller developments that command lower rents in tier 2 & 3 cities that typically have lower population densities lies in
  • ensuring that you offer the right product, in the right location,
  • maintaining flexibility to shift the development’s use to another.
•  Demand drivers for tier 2 & 3 cities are going to be either local consumption or cost considerations.
•  Building assets based on speculative demand is not viable in tier 2 & 3 cities as demand is largely opportunistic.
• For any tier 2 & 3 city to grow its industrial/warehousing real estate offerings on a sustainable basis, there should be at least demand for 2 million square feet of space from a mix of sectors. The demand should not be dependent on any one sector.
• Automobile sector finds it difficult to shift locations as they are heavily dependent on the relationship between major auto manufacturers and their OEM suppliers.
  • To attract auto manufacturers, state governments need to roll out the red carpet and go all out in supporting their setting up and subsequent operations, especially by providing all the necessary infrastructure from the beginning.
• Industrial and warehousing corridors can also be setup in locations that are not established by setting up relatively large and well-planned parks/townships that provide well developed infrastructure including housing and social infrastructure for education, health, recreation, etc. Examples shared included the Mahindra Lifespaces setting up such developments in new and emerging locations in Chennai, Jaipur and Ahmedabad.
• Therefore, the focus should be on creating sustainable townships to ensure success.
• Entrance of large companies like Eicher in a small town or city can alter the demand dynamics of the local market.
• Persistent problems relating to transport unions can kill the existing demand and shift it to other locations. Egs. – Rajpura, Ambala or Ludhiana.
• Comparison of market conditions in India vis-à-vis China, Japan or Korea are difficult and not right because their infrastructure is far superior, and their populations are not increasing like India’s.

Strategic Considerations for Large and Established Developers

• Established developers do not have any fixed notions about the opportunities in tier 2 & 3 cities. Their entry is largely opportunistic, i.e. driven by the emergence of new demand from an occupier that they drive increasing demand in the future.
• International developers operating in India are not keen on developing long gestation projects. They prefer prime locations that already have established demand.
• Nature of client’s operations or products also dictates the location needs. Egs. – Urban Ladder can operate out of its major location in Bengaluru and smaller location in Rajasthan. However, Mondelez needs multiple locations spread out geographically to ensure that its products are stored and delivered in the right manner and on time.
  • Consequently, established developers are not looking at necessarily have a wide geographical spread but if their important client/s need them to setup and service them at multiple locations, the developers are open to the idea.

Availability of Capital

• Capital is adequately available, and investors are faced with the problems of when and how to deploy it. In other countries, the speed of deployment ensures better returns even though the cap rates/yields are lower than India’s.
• Warehousing and Industrial Parks are a long-term play in India. Hence, investors need to be patient and allow time for building and developing.
• Cap rates/yields in India have compressed due to increased competition but they are not a source of worry for investors as they are still comparatively higher than other countries.

Locations to watch out for:

• Gujarat will see demand from companies involved in pharma, renewable energy, automobiles and auto components, besides ecommerce.
• Guwahati can be an exciting location in the north-east because of its geographical location as the only major competing city is Kolkata located at a distance.
• Coimbatore and Indore can possibly see demand generated from various manufacturing sectors as well as ecommerce.
• Anantpur – OEM suppliers for KIA Motors will mainly generate the demand, not ecommerce companies 

Future Considerations

• For warehousing sector, one needs to establish if local demand is being driven by increase in total retail demand (not only ecommerce demand), which is sustained post Covid-19 too.
• For manufacturing sector, we need to wait and watch the impact of the Central Government’s policies to boost industrialization versus the global dynamics such as the US-China trade war.
• The huge increase in number of transactions originating in tier 2 & 3 cities that are being handled by payment gateways also points to the large potential for setting up warehouses in these cities.
• Auto sector has seen good performance during this festive season; may even erase previous records.
  • However, the big question is that will this trend continue or is it a result of pent-up demand.
  • The sector also witnessed changes in choices and demand from consumers due to the pandemic, which can impact plans of auto companies.
  • Broad basing the customer base has helped auto companies and their suppliers to ensure capacity utilization.
  • Its still too early to say if these companies will increase their capacity after 6-12 months.