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Emerging trends in warehousing segment post Covid-19 lockdown

Date: 30-05-2020
Subject: Emerging trends in warehousing segment post Covid-19 lockdown
The implementation of GST, the continued government focus on building industrial corridors, the infrastructure status to logistics industry including warehousing, thrust on manufacturing and the promise of the Indian consumption market has whipped up the investment prospects of the country’s warehouse sector. The sector has attracted investments over $6.5 billion in the last 3 years from 2016 to 2019. The warehousing demand or the leasing activity has also has grown rapidly in the same period, increasing from 13.9 mn sq ft in 2016 to around 40 mn sq ft in 2019.

At a time when the Indian real estate industry has been facing headwinds on account of a difficult residential market, the warehousing property segment has emerged as a promising investment opportunity for institutional investors. However, the Covid-19 induced lockdown has led to slowdown in the warehousing industry with both occupier leasing and investment activity being subdued in Q1 2020.

Q1 2020 witnessed only 1 investment deal worth $54 million in the Indian warehousing sector. Economist across the globe have forecast India’s GDP growth to slow down significantly in 2020 due to the Covid-19 induced lockdown, affecting businesses across the board and reducing their aggregate demand for warehouses. Fearing this scenario to play out, investors have gone into the wait and watch mode. But the prospects of the warehousing industry are not as grim as it appears. Due to Covid-19, certain new trends are likely to emerge which can drive warehousing growth:

# Consolidation to dissipation
Covid-19 is making occupiers to rethink their strategy. The concept of consolidating warehouses at a single location is getting challenged. Occupiers and supply chain managers are now contemplating if it is better to own multiple warehouses at different locations instead of a single large regional warehouse. The rationale is that if a particular area is locked down due to Covid-19 or any other event in the future, they can still operate through other warehouses. This will increase the demand for warehouses.

# Time to stock up over being on time
To reduce inventory carrying cost, manufacturing companies across the globe were following or moving towards just-in-time (JIT) system for inventory management. The Covid-19 induced lockdown of China had jolted manufacturing chains across the globe and caused significant problems to companies employing JIT. For example, in India, many pharmaceutical companies had faced challenges due the disruption in supply of Active Pharmaceutical Ingredients (APIs) which is a key input item for pharmaceutical products and majority of which is manufactured in China. Going forward, companies would prefer keeping higher inventories over JIT, thereby increasing the demand for warehousing space.

# E-commerce to spread its wings wider
E-commerce segments catering to grocery and daily essential have seen spurt in retail demand owing to the Covid-19 induced lockdown of malls and retail spaces. For standardized products like electronics the fear to buy product from an e-commerce websites vs purchasing offline amongst masses has come down over the years. But for groceries, given the perishable nature of items and quality of product not being standardized, many used to resist ordering online. Given the convenience e-commerce offers and the fear of contracting Covid-19 in public spaces, people may not venture out for grocery shopping at malls once the lockdown ends. Even malls may limit entry of people to maintain social distancing. Thus, this lockdown may bring about a behavioral change and increase the acceptability of buying groceries and daily essentials online. Some of the big organized retailers have identified this trend and have started strengthening their e-commerce and home delivery infrastructure which was not their focus earlier. Such a shift, if it were to happen, would give a significant fillip to the strong fundamentals of warehousing industry and increase demand from the e-commerce segments.

# Moving out of China
Warehousing industry is also likely to benefit from the shift in manufacturing units outside China. Many companies globally are in talks to reduce their dependence on one particular country (presently China) for the entire manufacturing needs and are planning to shift certain part of the activity elsewhere. There are 5-6 countries which are competing directly with India to attract these companies. Each country offers its own set of advantages and challenges. However, even if 1/6th of them come to India, the gains for the nation and the industrial and warehousing sector would be immense.

We may not witness investor activity in warehousing in the near term due to the Covid-19 related uncertainties. However, as the dust of the pandemic starts settling, investors would return to the warehousing sector with renewed vigor in anticipation of the potential for renewed growth as these emerging trends start to unfold.

Source:- financialexpress.com

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