The warehousing sector is re-writing the country’s real estate story and has emerged as one of the most sought-after asset classes by institutional real estate investors.
The overall stock of warehousing in India stands at 283 million sq. ft as of H12022, this implies a per capita stock of <0.1sf which is abysmally low compared to regional peers such as China (~10sf) and developed market peers such as the USA (~47sf). Warehousing growth is now at an inflection point, fuelled by multiple drivers including favourable regulation, consumption, e-commerce, and manufacturing growth, etc. and is expected to grow at a CAGR of ~18% over the next 3-4 years. Accordingly, the sector has seen significant interest from international institutional investors and has attracted close to USD 6 billion in FDI over the past 4-5 years.
In addition to robust growth, the attractiveness of warehousing is also due to the fact that it looks significantly de-risked compared to other types of real estate. The key risks for any real estate project broadly include the following- land/title, approval, development, leasing/market and exit risks. Warehousing scores favourably on most of these parameters versus other types of real estate.
• Land/title risks can be mitigated by extensive diligence.
• Since warehousing projects are usually outside municipal limits, they require fewer approvals which can be secured faster compared to, say a residential or office project which is located within the city.
• Warehousing projects entail lower complexity and use “Pre-Engineered Building” (PEB) structures which have shorted build cycles and are therefore less likely to be exposed to large cost or time overruns.
• Most warehouses are also built on a “Built To Suit” or BTS basis due to which they are fairly de-risked from a leasing/market perspective early on.
• Lastly, there is a fairly deep institutional market and high demand for institutional quality warehousing assets due to which exit risk is fairly minimal.
Financialisation of real estate has enabled retail investors to access previously inaccessible or difficult to access real estate investment opportunities in a seamless, hassle free and transparent manner. While REITs provide an avenue to own institutional quality commercial real estate leased to high quality tenants, AIFs provide a well-defined regulatory framework to investors to ensure the highest levels of governance and transparency and protection of investor interest, including access to the SEBI Complaints Redressal System platform which allows investors to seek timely resolution to any issues faced by them.
Under the relevant AIF regulations, HNIs or High Net-worth Individuals (including Non-Resident Indians), family offices, corporates, and institutional investors such as insurance companies and pension funds are eligible to invest in this product provided that they make a minimum capital commitment of INR 1 crore. This product is ideal for investors who are looking to add exposure to a high growth real estate segment which is likely to be closely correlated with the overall “India growth story”, but who do not want to take on the hassle of physical ownership and development. In terms of risk profile, this can be regarded as moderate-aggressive as the scheme is closed ended with illiquid underlying investments which are in the nature of (unlisted) equity, subject to market, business and other risks with no guarantee of returns or protection of capital.