Cities like Ludhiana, Coimbatore, Vapi, Guwahati, Bhubaneshwar, Surat, Lucknow, Patna, Siliguri and Ambala to name a few, are witnessing increased warehousing demand and investment.
Amit Goenka, MD & CEO, Nisus Finance Services stated that about 300 million square feet of warehousing has already come up which is likely to double in less than two years. “It's a massive target which is not possible without a full on chugging along of the tier two cities and non-metro locations. As per the statistics in the last three to four years, warehousing industry has grown at a CAGR of almost 14% and apart from top six cities - Ahmedabad, Bangalore, Chennai, Mumbai, Delhi and Pune, Grade- A warehousing providers are expanding operations in 15 small cities across India.”
Pratiik Jalan, Director, Jalan Builders that has presence in Siliguri and Guwahati concurred, “The biggest advantage of a small city is the land cost and rentals that are becoming unviable in metro cities. Companies are mainly focusing on Tier-1 cities as distribution hubs with main warehouses in a tier- 2 or 3 location. However, a big challenge in tier 2 cities is the mindset of the land owners. Their percentages are always based on Grade D warehousing specifications. They are stuck at construction cost of INR 800- 900 per square feet and are not ready to accept the current costs of INR 1400 and above for a Grade A warehouse.”
Nirav Kothary, Executive Director, Godwitt Construction Pvt. Ltd that is based in Ahmedabad shared, “About 15 years back, the yield was around 12% to 14%, which has now come down to 8% due to the rising input costs. This makes tier 2 cities even more attractive for the companies. But, when a customer comes to a tier-2 city, the expectation is that of a tier 1 city quality with ready supply and availability. Unfortunately, tier-2 markets don't have that. We have to think ahead of the curve, build the facility in a potentially attractive region and then probably wait three to six months for a customer to occupy that space”.
Amit Goenka summed up that there is a need for further acceleration in small cities and a level of maturity in the sector is yet to show in these locations. “All industry reports indicate that the growth and the aspiration to find liquidity in the warehousing market cannot come without extraordinary growth happening in the tier 2 locations.”
THE WAREHOUSING PATTERNS
According to the experts in tier 1 cities, people have access to malls to source products. But in tier two cities, access to malls and branded stores is limited so, the e-commerce driven warehousing demand in tier 2 and 3 cities will remain much higher in comparison to tier 1 cities.
Moreover, due to the pandemic, the demand for e-commerce has increased in the Tier 2 and Tier 3 cities. One major reason is the rapid internet penetration and second is the increase in consumer spending on branded goods.”
Pratiik Jalan stated, “Demand for D2C warehouses has increased dramatically in recent years. This is mainly driven by the E-commerce and grocery markets who are setting up last-mile delivery options for faster deliveries.”
As per Amit Goenka, most warehousing facilities in small cities is managed by unorganized local players and there is a shortage of high quality, technologically advanced grade A warehouses. “While, the organized players are now foraying in tier 2 cities and are attracting the investors, the local developers too are improving quality, given the rising demand.”
Nirav Kothary shared, “The lag in escalation in commodity prices and the escalation in rentals is anywhere between six months to a year which impacts the yields in the near term future. Eventually, occupiers would have to pay if they want the quality they desire.”
Nirav Kothary stressed on the uniformity of government sanctions and faster approvals. Pratiik Jalan felt that tier 2 cities require good infrastructure and feasible land parcels for organized developers to step in.” Amit Goenka added that the industrial clusters and manufacturing hubs form the growth corridors for the warehousing sector and the ESG compliant facilities will be in demand.
THERE HAS BEEN A SIGNIFICANT GROWTH IN E-COMMERCE IN MARKETS BEYOND THE MAJOR CITIES, AND THUS THE NEED FOR FASTER DELIVERIES. TO STRENGTHEN THIS TREND, 3 PL PLAYERS ARE CAPITALIZING ON CONSUMPTION-DRIVEN DEMAND IN SMALLER CITIES.
