ASIA NEWS: Circling Indian logistics

Regulatory reforms, a rise in e-commerce and the growing appeal of India as a manufacturing hub has put the spotlight on the country’s logistics sector, with increasing numbers of foreign investors eyeing the asset class.

The latest firm to jump on the bandwagon is e-Shang Redwood. Last month, PERE reported that the Asia-focused logistics developer and operator is in the process of obtaining formal approvals to open an office in the country. Once these are in place, Jai Mirpuri, ESR’s Singapore-based managing director for investments, will relocate to India to head its country operations.

For ESR, which until now has concentrated its efforts in China, Japan and Korea, an entry into India will mark its first regional expansion effort following the merger between e-Shang and Redwood completed early last year. According to reports in the Indian press, Ivanhoé Cambridge, the real estate subsidiary of Canadian pension fund CDPQ, is also mulling investments in Indian logistics, while Canada Pension Plan Investment Board is understood to be leading the negotiations to invest in IndoSpace, a logistics joint venture between Everstone and Realterm that will be listed as a real estate investment trust.

In the Emerging Markets Logistics Index for 2017, a report recently published by the global logistics firm Agility, India’s logistics market was identified as having the greatest growth potential.

A key driver is the Goods and Services Tax, billed as a “game-changer” by Agility. GST is India’s most ambitious tax reform, aimed at creating a single nationwide sales tax that will replace numerous local taxes, and is expected to be rolled out in July. There is also renewed government focus on the country’s manufacturing sector, with significant investment outlay announced for electronics manufacturing and export infrastructure in the 2017-18 financial budget, according to property consultancy CBRE’s India logistics report.

For institutional investors, ground-up warehouses can be an attractive long-term yield play once the development process is completed, with the potential for generating high-teens returns, said Sanjeev Dasgupta, chief executive of Ascendas Property Fund Trustee at Ascendas-Singbridge.

This is not the first time the international investment community has tried its luck in Indian logistics. Redwood itself had a Mumbai office in 2007 and spoke of plans to develop logistics parks in several Indian cities at the time. According to one source familiar with the firm’s plans, however, the global financial crisis and foreign capital’s hasty retreat from India’s property sector was a major dampener. ESR did not respond to questions about when the office was shut down.

In Dasgupta’s view, many firms that set up shop in Indian logistics around the global financial crisis were unable to deploy capital as quickly as they would have liked because of the slow pace of development. Additionally, for many international investors, the opportunity at the time was comparatively bigger in markets like Australia and China, which had larger portfolios of existing warehouses.

Aside from regulatory and infrastructural drivers, an important change since then is the customer’s propensity to pay rent for warehouse facilities. Industry experts says warehouses in the top Indian cities now generate average rents of 15 rupees ($0.23; €0.21) to 25 rupees per square foot, much higher than a decade earlier.

But other challenges, particularly high labor costs, continue to exist. “India has one of the highest logistics costs in the world,” explained Dasgupta. “Close to 14 percent of India’s GDP is spent on logistics. This is much higher than the logistics cost to GDP ratio of around 10 percent in the US and 7 percent in Europe. Also, from a development standpoint, title diligence issues can crop up in agricultural land parcels located in the outskirts of cities that are well suited to logistics. This can be challenging for a new entrant into India.”

However, despite those reasons, given India’s current reform-focused government, foreign investors are betting that the logistics sector will be able to take off this time as an institutional-grade investment class.