Warehouses and data centres have emerged as attractive alternative investment classes that offer long-term, stable returns for both domestic and global institutional investors, including those of Indian origin
By Vishal Duggal
Housing Development Finance Corp Ltd (HDFC) chairman Deepak Parekh, while addressing the company’s 44th annual general meeting, described warehousing and data centres as the segments that will drive future demand for commercial real estate in India. He attributed his premise to the rapid growth in e-commerce and digital infrastructure in recent years. Significantly, the increasing demand for warehouses and data centres is based on the underlying need for sound logistics that e-commerce and digital transformation in the new millennium have in common.
Both warehouses and data centres are integral to the industrial sector’s growth. Pertinently, Prologis, the largest industrial real estate company in the world and a dominant player in warehouses, is also foraying into data centres. In the US, Prologis has partnered with Skybox Datacenters to convert industrial sites that it owns into data centres. Largely, Prologis is the majority partner in a joint venture which owns the land or property, while Skybox works on the development, marketing, and operation of the resulting data centre. Similarly, reputed Indian real estate developers are partnering with global operators for developing hyperscale warehouses and data centres.
Prospects of warehousing
Warehousing has emerged as a promising asset class in the real estate sector. According to Coldwell Banker Richard Ellis (CBRE), each $1 billion in e-commerce sales needs an additional 1.25 million sq ft (116,000 sq m) of distribution space to support it.
The outbreak of Covid-19 saw a new wave of economic activity across the country, leading to unprecedented increase in e-commerce transactions. The usage of warehousing facilities saw a sharp increase in the wake of the pandemic-induced lockdowns as e-commerce platforms sought to meet the high demand for goods. Similarly, the organised food delivery segment also gained great momentum, fuelling cold chain warehousing space requirements. Even as the pandemic has waned, e-commerce continues its growth trajectory on the back of growing incomes, and changing lifestyles and work patterns that reflect consumers’ increasing reliance on e-commerce players for the delivery of groceries, food and numerous other items.
Investment in the industrial and warehousing segment is on the rise owing to strong demand from e-commerce companies, which feel enthused by India’s strong post-Covid economic recovery coupled with a steady positive outlook. The country is likely to emerge the third largest consumer economy by 2030 with proven strengths in the manufacturing domain. Significantly, the Warehousing Market in India 2022 Report published by Netscribes (India) projects the warehousing market in the country as growing to ₹2243.79 billion by 2026, expanding at a CAGR of 10.90 percent.
As its construction costs are much lower, and occupancy rate much higher, warehouse investment is gaining traction as a stable and reliable avenue in commercial real estate. Companies in the e-commerce segment prefer to stock inventories closer to customers’ locations to improve the quality of products at delivery, and optimise efficiency. As a result, demand for warehousing in smaller cities too has shown an uptick.
E-commerce is not the sole factor for the growth of the warehousing segment. The government’s Bharatmala Project focuses on establishing 35 multimodal logistics parks throughout the country. Thanks to favourable policy changes such as the introduction of goods and services tax (GST), tax benefits for FDI investments, interest rate cuts, and corporate tax reforms, investors have shown increasing inclination to explore the new industrial asset class of warehousing and logistics. This has led to increased buoyancy in the industrial, logistics and warehouse real estate market in the country.
According to a report by investment management firm Colliers, during the first six months of 2022, the gross absorption of industrial and warehousing real estate in the top five cities of India stood at 10.8 million sq ft. Of this, Delhi-NCR accounted for the highest activity at 28 percent, with Pune a close second with 24 percent share of demand. About 55 percent of the gross absorption was led by third-party logistics players, followed by the engineering and automobile sectors with 12 percent each.
Trends in Grade A Gross Absorption
| City | H1 2022 (mn sq ft) | H1 2021 (mn sq ft) | % chg |
| Bengaluru | 1.4 | 2.0 | -29% |
| Chennai | 1.7 | 2.0 | -16% |
| Delhi-NCR | 3.0 | 3.0 | 0% |
| Mumbai | 2.1 | 0.7 | 199% |
| Pune | 2.6 | 2.4 | 7% |
| TOTAL | 10.8 | 10.1 | 7% |
Gross absorption refers to the actual leasing and does not include renewals
Source: Colliers
Growth of data centres
India’s digital economy is currently valued at around $200 billion, and is estimated to be around $800 billion to $1 trillion by 2025, as per a 2019 report by the Ministry of Electronics and Information Technology (MeITy). The surging demand for technology consumption and favourable policy climate have spurred the requirement to set up physical spaces to store whopping amounts of digital information. In fact, data centres are the digital infrastructure required for India to become a major economic power in the world as they aid in capacity building for storing and managing the humongous consumption of data today.
According to a CRISIL Ratings report, data centre capacity in India is expected to double to ~1,700-1,800 megawatts (MW) by fiscal 2025 from ~870 MW last fiscal. This will require investments of over ₹40,000 crore, out of which a third will be for acquiring land, a fifth for substations, and the balance for civil work, purchase of equipment and fit-outs. The corporate embrace of advanced technologies and digital infrastructure, and the increasing use of smart devices by individuals have led to a massive spurt in data and cloud usage (wireless mobile data traffic grew ~31% to ~253 exabytes in 2021), creating huge demand for data centres, adds the report.
The increasing internet penetration, work from home/or hybrid model, online education platforms, business conferences/webinars, tele-health consultations, development of 100 cities identified under the Smart Cities Mission, widespread use of IoT and AI-based systems, incorporation of technologies like building information modeling (BIM), blockchain, and increasing use of cloud services have boosted the demand for data and storage capacities.
The upcoming roll-out of 5G services will enable faster content delivery over the internet, higher bandwidth with increased connection density and lower latency. Government policies, regulatory and policy-based incentives which support digitisation and data localisation, seeking storage of sensitive data within the country, coupled with the proposal to build economic zones specifically for data storage have further empowered the data centre ecosystem to evolve and scale up quickly.
Data centres currently occupy nearly eight million sq ft across the top seven metros and have emerged as an important asset class in the real estate business. According to property consultancy Savills India, real estate demand for data centres is set to increase by 15-18 million sq ft in the next four to five years across major Indian cities. Thanks to fast expanding network connectivity, cost-effective data services, availability of skilled labour, and low climate risk, India is likely to serve as a regional data centre hub in Asia-Pacific, drawing significant investment in data centres.
Data centres are all set to push up demand for land with similar impact on price points in industrial belts where there is existing infrastructure for ample supply of high-tension power and high-speed internet from multiple network providers. For instance, in primary data centre markets like Navi Mumbai or Ambattur in Chennai, land prices have appreciated by 30-50 percent in one to two years.
Warehouses and data centres offer cost-effective, resilient, and efficient avenues for meeting the increasing needs of India’s fast-growing industrial infrastructure sector, which holds out promising prospects for both domestic and overseas investors.
According to a report by investment management firm Colliers, during the first six months of 2022, the gross absorption of industrial and warehousing real estate in the top five cities of India stood at 10.8 million sq ft.
Data centres are the digital infrastructure required for India to become a major economic power in the world as they aid in capacity building for storing and managing the humongous consumption of data today.
