India continues to remain a silver lining in an otherwise turbulent global investment landscape. The year 2016 witnessed India 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 recouping 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, 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 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 increasingly diminishing returns.
The residential segment continues to be in the midst of a slowdown and investors are cherrypicking options there. This has caused 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 on the outskirts of major cities on land parcels spread across 50-100 acres.
- The 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 of foreign investment for single 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 investors like Blackstone, Xander, GIC, Morgan Stanley, towards the Indian retail real estate sector.
Like the warehousing business, the 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 Rs 450 crore.
- APG Asset Management and Virtuous Retail, sponsored by investment firm The Xander Group Inc., has formed a joint venture that has acquired an initial portfolio of three retail assets from a Xander-sponsored fund in a transaction valued at approximately Rs 2,000 crore ($300 million).
- Xander Retail Partners - Virtuous Retail South Asia bought North Country mall in Mohali from Sun Apollo & JJ Gumberg for Rs 700 crore.
- Carnival Group bought Elante Mall in Mohali from L&T for Rs 1,785 crore.
- Blackstone bought Alpha G Malls in Amritsar and Ahmedabad from Alpha Corp for Rs 1,600 crore.
The focus on retail is being driven by the fact that the next major cities, post the metros, still have favourable statistics -- large and rapidly urbanising populations, rising disposable incomes and 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 possibility of better yields. India has occupied a remarkably high ranking in the global FDI Confidence Index 2016 retail rankings. India ranks ninth after United States, China, Canada, Germany, UK, Japan, Australia and France in the FDI Confidence Index. India's net retail sales are quite significant among emerging and developed nations -- the country is ranked third after China & Brazil.
Lastly, transactions are also being fuelled by developers cashing out on the basis of valuations -- which looked very unlikely not so long ago --, especially when other segments like the residential sector are still in the middle of a slowdown.
Warehousing in India has seen massive investor interest on account of government reforms. The implementation of the Goods and Service Tax (GST) should provoke a consolidation of assets in the warehousing and logistics spaces. Unlike the 'hub and spoke' model which was 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 larger amounts in fewer assets, making monitoring easier.
If managed well, such assets would also attract healthy valuations at the time of monetisation through REITs or other structures. Policies allowing 100 per cent foreign direct investment (FDI) in warehouses and food storage facilities under the automatic route as well as declaring some zones as tax-free have made the sector stage a strong comeback 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, who enjoyed a 30 percent 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 unorganised -- which by itself creates new opportunities. 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.
(The writer is National Director, Capital Markets and Investment Services, Colliers International India)