Land-buying hurdle hits private equity firms betting on warehousing units

The total warehousing space is estimated at 739 million sq ft in 2019 for the manufacturing sector
In 2015, US-based private equity (PE) firm Warburg Pincus and Bengaluru-based Embassy group had set up a joint venture for industrial and warehousing properties. 

The JV had an equity base of $250 million. Four years since the signing of the pact, people in the know say the JV could invest just $100 million.

Over $5 billion in funds have been committed by PE firms and pension funds such as CPPIB, Warburg Pincus, and Ivanhoe Cambridge, over the past five years. Global investors such as Morgan Stanley have made a comeback into Indian properties and bought controlling stakes in warehousing projects this year. Proprium Capital Partners, set up by former Morgan Stanley employees, is also focusing on this segment.

“This shift (to modern warehouses) has happened due to increasing demand from industries such as automotive manufacturing, third-party logistics services, and e-commerce. Implementation of the GST and infrastructure status to the sector is also driving demand,” said Aditya Virwani, chief operating officer at Embassy group.

The total warehousing space is estimated at 739 million sq ft in 2019 for the manufacturing sector, projected to grow at a compound annual growth rate (CAGR) of 5 per cent over the next five years to 922 million sq ft, according to Knight Frank’s India Warehousing Market 2019 report. 

The Knight Frank report found that PE funds had a 49 per cent share in total investments. This was followed by sovereign and pension funds at 31 per cent, and developers with the remaining 20 per cent.

However, consultants say most of the investment announcements are only on paper. “All this is futuristic. We do not know whether supply will come or not. We need to ask the developers whether they have started construction or not,” said Rituraj Verma, partner at Nisus Finance.

Verma said that if the slowdown continues for another two years, there will be problem with the supply. Sources in Proprium said too much money was chasing warehousing deals even as demand wasn’t too high. “Global funds have hardly put anything due to delay in buying land. If all the money committed is deployed, there will be bloodbath,” the source said. Proprium has invested $150 million in Hyderabad-based Scalar Spaces and looking to float new platforms in warehousing. 

Another source said a Chinese firm was offering 20-30 per cent higher than market places to land owners in places where Indospace had aggregated land parcels in the last couple of years. 

Being the largest owner of modern warehouses, Indospace has 34 million sq ft of developed and under-construction properties. Canada’s CPPIB has closed deals of $1.3 billion with Indospace to set up a new JV. 

Entry of too many players, along with too much cash, has kept many PE funds out of the segment. “Everybody is coming into this segment; the market is getting hot. In these kind of markets, we tend to make mistakes,” said Ambar Maheshwari, CEO of PE funds at Indiabulls Asset Management.

Land issues

Most developers-cum investors say buying land is a major hurdle. “Land acquisition has been a challenge and that is where majority of the money is utilised. We are being conservative and watching demand. Land can be complicated and we don’t want to get stuck,” said Virwani of Embassy group.

He added that there were laws governing construction in various states, which differ from city to city.  The source in Proprium agrees. “Buying land in India is not easy. Everyone is struggling.” 

Verma of Nisus said 90 per cent of the land deals fall off. “Whatever supply has been projected, only 10 per cent will come. If the slowdown persists, even 10 per cent won’t come,” he said.

To avoid hassles of land aggregation and conversion, warehouse developers/investors are also buying developing developed warehouses, Verma said.

For instance, LOGOS India, set up by Assetz group and LOGOS, bought two logistics park in Chennai from the Casagrand group for Rs 700 crore this year.

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