Warehousing is going through a rough patch. Can it bounce back? E-commerce will decide. – ET Prime

What you resist, persists. If it is India’s warehousing sector we are talking about, add “and then some”.

The January-March quarter was already looking grim for warehousing companies when the coronavirus struck. The real-estate business, of which warehousing is a part, has been languishing for years now because of a liquidity crunch and a slowdown in consumption. Warehousing, too, which has emerged as the hottest asset class both among developers and private-equity investors, has not been spared. Besides, it is a sector closely linked with the larger economy, which has been sluggish throughout FY20. The coronavirus outbreak has aggravated the situation, and new business has taken a hit.

“This (January-March) has been the slowest quarter ever. The April-to-June quarter is already gone,” says a mid-size developer from Pune.

Following the viral outbreak, sectors like auto and pharma, which were already reeling from an economic slowdown, have further deferred their plans to invest in warehousing. The silver lining has come from e-commerce and retail, the biggest consumers of Grade A stock — the top category of warehousing space. Flipkart, Bigbasket, Amazon, and Reliance Retail have signed new lease contracts.

Notwithstanding the surge in absorption by e-commerce and retail, the warehousing industry is likely to remain subdued in the next couple of quarters. However, once the coronavirus outbreak plays itself out, there will be a bounceback.

India’s warehousing capacity at the end of 2019 was 211 million square feet. JLL India expects this to cross 379 million square feet by 2023, with an increasing share of Grade A spaces. Warehousing has grown at a sharp rate — around 25% annually in recent years — and vacancy levels are expected to remain at 10% in the near future.

Private-equity investors, who had been extremely bullish in the last couple of years, are exercising caution for the time being. Insiders say the industry will be waiting for a comeback, since the demand fundamentals are still intact.

In the backdrop of what the sector has been through lately, what are the chances of this outlook emerging true?

Atmosphere of uncertainty
“Absorption has been slow in January-March primarily, as decision makers have not been able to travel and finalise deals. There were abundant queries in the first two months. However, March has been slow on (deal) closures,” says Aditya Virwani, spokesperson, Embassy Industrial Parks, a major player in the Grade A segment. “We believe the spillover will flow to the next quarter and the absorption numbers will reflect that.”

Embassy Industrial Parks has about 4 million square feet of space under negotiation currently, of which a major chunk is from e-commerce. Virwani foresees demand from e-commerce companies to stay intact, as it has been seeing a surge in business.

However, some insiders say many discussions with e-commerce companies have failed to materialise in this quarter because of the prevailing atmosphere of uncertainty. A developer who had multiple discussions with Amazon and Flipkart says, nothing materialised. “I think the same has happened with multiple players. In the current scenario, most of them are looking for temporary spaces to dump stuff.”

Rohit Hegde, managing director at KSH Infra, which operates warehousing and industrial-logistics parks at Chakan and Talegaon in Pune, echoes the developer’s views. “We got a lot of enquiries from January till the first week of February. Then everything came to a standstill,” says Hegde. “We had good enquiries from a couple of European clients, but once they went back home, they never got back.”

Significant transactions have been few this quarter, largely because companies have postponed decision making. Last month, Embassy Industrial Parks leased out 350,000 square feet of warehousing space to German third-party logistics (3PL) company Rhenus Logistics in its Farrukhnagar facility in Haryana which was being developed at a cost of INR500 crore. Rhenus operates 30 warehouses in India and with this latest addition, its total footprint stands at 2 million square feet across key locations.

Similarly, Allcargo Logistics leased out 3 million square feet of warehousing space in Delhi-NCR, Bengaluru, and Hyderabad to Flipkart and Decathlon this month in a deal facilitated by commercial real-estate company JLL India.

This too shall pass Although demand has slowed down, most industry insiders consider this as a short-term blip, depending on how soon the country recovers from the corona shock. Experts say the January-March quarter has always been the weakest quarter for warehousing in terms of absorption. And the October-December quarter has been the strongest. Usually it is 10%, 20%, 30%, and 40% across the four quarters of the calendar year. So, if the first quarter sees a blip from 10% to 5%, the next may see an absorption of 25% (20% + 5%). In case the blip continues for the next quarter as well, that is 20% corrects to 15%, then the third quarter may increase from 30% to 40%. Similarly, 40% in the last quarter can increase to 50%.

“We might see this ripple effect because the fundamentals are still intact. The strongest stakeholders — e-commerce and retail — are the biggest gainers of the current situation,” says Chandranath Dey who heads the industrial operations, business development, and industrial consulting practice at JLL India.

Hurdles in running the show Operational challenges and delayed delivery of construction sites have also affected absorption. Warehouse construction is highly labour intensive. Because of the lockdown, labour reporting on sites has been affected, which will impact construction timelines. Normal speed of construction will take a month or two to resume, following mass migration of labour back to their home states.

Dey says one of the medium-term (three to four months) effects of the new situation is that people who were on the verge of signing lease contracts are now asking for new terms. “When a property is being handed over to a client, a month or two is given by the developer to the end user as a rent-free period to do fit-outs such as racking systems. They are asking for a couple of months of additional rent-free period.”

He adds that although there have been no discussions on decreasing rentals, clients are negotiating on security deposits, asking to bring it down from three months’ rental to two months’.

Warehousing and 3PL companies with clients in FMCG, grocery, food, and retail segments say one of the biggest challenges they are facing is to get workers and staff to the warehouses. Although the government has issued orders exempting sale/delivery of food and essential services, there is a gap in ensuring that the authorities down the line implementing the orders are on the same page.

Reacting to the coronavirus scare, the Bhiwandi gram panchayat recently issued a blanket call for all warehouses to be shut down leaving it to individual warehouses to go and present justifications for their case to the authorities.

Such situations are creating mayhem for e-commerce companies. All leading e-tailers, including Flipkart, Amazon, and Bigbasket, have found their operations stuttering because of warehouses being abruptly shut down, supply chain challenges, and trucks carrying both essential and non-essential items being stopped at state borders.

Experts say since most of these warehouses have a GST registration, there can be some digital means to identify warehouses that should be allowed to keep running. For example, a tyre warehouse need not be open, but a warehouse delivering groceries should be. Also, the government needs to define the means of transport of such operations as well as working hours. “If this would have been thought of earlier, they would have done it. Now we are struggling,” says a person who has operations in Bhiwandi.

The bottom line Experts say even when the current demand surge across food, grocery, and FMCG averages out, the new normal for warehousing will be higher than now. The reasons to invest in technology and automation will become more apparent.

But if there is a sudden reduction in workforce — as in the current circumstances — how can throughput be maintained? “Now is the time when warehouses will move towards higher-grade warehousing, where you can build more automation and reduce people dependency,” says an expert.

Another aspect is that e-commerce may end up gaining new permanent online purchasers because of the current situation, but online purchasing is largely led by food, grocery, and essentials. This will average out once the situation stabilises.

A large part of the warehousing growth in India, and the investments in this sector, were driven by the long-term growth potential. “So, there was a shift towards quality warehousing and consolidation. But if the overall economy slows down, e-commerce will be impacted as well,” says Aloke Bhuniya, CEO at industrial real-estate platform Ascendas Firstspace.