GST bringing realty shake-up

Retailers, both of physical stores and e-commerce entities, fast moving consumer goods (FMCG) companies and those in consumer durables have started rejigging their warehouse strategy.

This is in preparation for the national goods and services tax (GST), with the government working to an April 2017 deadline. All this could mean a shake-up in real estate, say analysts. A rough calculation suggests these businesses could look at reducing their warehouse count to half, while stepping up the total space acquisition in select destinations, once GST comes into play. In the next two to three years, businesses could see significant cost reduction due to the revised strategy.

Hindustan Unilever, Nestle, Johnson & Johnson and Shoppers Stop are among those to have begun work on consolidating their warehouses, according to a source. These companies will take up mega space, in millions of square feet, to set up ‘mother warehouses’, he said. In the online space, top companies such as Flipkart and Amazon have been on an expansion spree for warehouses and fulfillment centres in the past two years, primarily to suit the complex tax structure through the country. Now, however, they won’t feel the need to have warehouses in every state and can strategise accordingly, Vijaya Ganesh Thangavel, managing director, Land & Industrial (India), Cushman & Wakefield, told this newspaper.

For instance, Max Fashion, a prominent retailer, has eight warehouses totaling 400,000 sq ft. The number is likely to come down to four after GST, says chief executive Vasanth Kumar. “The number will get firmed up once we know the full GST details and the implications such as the reverse logistics needs,’’ he said. Post GST, their warehouse count will be down but the total space covered could go up to around 600,000 sq ft by 2018 “to meet future business needs, as well our rate of growth at a 30-plus per cent CAGR (compounded annual rate)”.

If a typical e-commerce company was taking 300,000 to 400,000 sq ft in metros and tier-1 cities for warehouses, 100,000 sq ft in tier-2 and 40,000 to 50,000 sq ft in tier-3, the plan now will be to go for million sq ft space and more, away from big cities and in fewer locations, primarily where real estate cost won’t be prohibitive, says Thangavel of Cushman. Distribution centres, smaller in size in the range of 40,000 to 50,000 sq ft, could be set up closer to cities.

The biggest trend now is that prominent developers are getting into the warehouse space, which has mostly been a domain of local land owners till recently, according to Thangavel. Along with realtors, a new breed of advisors are coming up, only for warehouse planning. Also, warehouse parks are being set up for large structures. While the exercise of restructuring the warehouses will take a couple of years, he projects a cost reduction of at least 10 to 15 per cent by 2019-2020. Estimates are that big companies which have on an average one warehouse in every state, totaling to anything from 20 to 25, might look at eight to 10, pan-India post-GST.

“We understand that a few of the larger companies have started consolidating their warehousing requirements in strategic locations, in anticipation of GST, with a view to bringing efficiency into their supply chain,’’ said Rami Kaushal, managing director, Consulting and Valuations, CBRE South Asia.

Besides retailers and FMCG companies, even pharmaceutical companies would look at rationalising the number of operational warehouses and swap these for better quality and larger format ones, he said.

“Implementation of GST is expected to lead to rationalisation of warehousing demand, leading to lower logistics cost and reduced delivery time of manufactured goods,’’ Kaushal explained. The current complicated tax structure meant that choice in setting up inventory and distribution centres were based on the tax regime, rather than on operational efficiency, he said.

GST, when implemented, will free the decisions on warehousing and distribution from these tax considerations, according to Kaushal. ”This would enable occupiers to create larger hubs, servicing two or more states from a single location, which would help optimise inventory costs and increase efficiency.’’ This shift in operational planning would ultimately result in a hub and spoke model being adopted by many of the occupiers, he added.

Industrial warehousing space is estimated at approximately 800 million sq ft across the country and is expected to grow by nine to 10 per cent annually. A few sectors such as e-commerce, modern retailing and FMCG are expected to grow at about 20 per cent annually in the short term, according to CBRE.

A recent JLL report listed the National Capital Region, Mumbai, Pune, Bengaluru, Chennai, Hyderabad, Kolkata and Ahmedabad as top warehouse hubs. These eight city hubs together had a cumulative supply of organised Grade-A and Grade-B warehousing space of around 97 mn sq ft in 2015; this is expected to grow to around 116 mn sq ft by the end of 2016. It added that GST will result in emergence of new hubs such as Belgaum, Bhubaneswar, Coimbatore, Goa, Guwahati, Indore, Jaipur, Kolhapur, Lucknow/ Kanpur, Ludhiana, Nagpur, Patna, Raipur, Ranchi, Vapi and Vijayawada.

 

Source: http://www.business-standard.com/article/companies/gst-bringing-realty-shake-up-116090801173_1.html

Commercial realty witnesses rising interest from private equity funds

The commercial real estate sector is witnessing increased interest from private equity funds, with several large institutions focusing on completed and leased commercial assets for investment.

In 2015, private equity real estate firms deployed more than $5 billion in Indian real estate companies and projects — the highest since the financial crisis of 2008 — through 90 deals, according to research from Venture Intelligence. Large investors and established developers also created several joint venture platforms in the past year, it said in a report.

Of the investment made, commercial projects accounted for 10%, it said. “Most of the private equity funds that India is receiving is from sovereign funds and pension funds,” said Sanjay Dutt, managing director, India, at realty consultants Cushman & Wakefield. “These funds prefer to invest in safer assets and have the potential to make long-term investments.” Completed leased commercial assets are seen as the best bet for these investors.

 

They have also been actively getting into tie-ups with builders to make investments in India. In one of such arrangements, Tata Group’s real estate and infrastructure development arm, Tata Realty & Infrastructure, partnered with Standard Chartered Private Equity to create a Rs 3,000 crore investment platform. While Goldman Sachs and Bengaluru-based property developer Nitesh Estates formed a $250 million fund to invest in income producing commercial real estate assets in India, APG and Xander also launched a $300 million India office venture.

Similarly, US private equity giant Blackstone formed a special purpose vehicle with Embassy Property Developers, while sovereign wealth fund Qatar Investment Authorities agreed to back real estate firm RMZ to buy commercial assets.

“The world economy is unstable and risk appetite among investors is going down. Funds want to invest in income-generating assets as they are looking for safe and long-term investment,” said Raj Menda, corporate chairman at RMZ. The company is further looking to raise $600 million to invest in income-generating assets.

From the REIT perspective, private equity funds that are planning to launch REITs are seeking to build a portfolio of commercial assets.

“Commercial platform is extremely important as office assets cannot survive merely on leverage (borrowed) money. Equity money is extremely important to increase quality of commercial assets and long-term success of real estate investment trust,” said Rajeev Bairathi, executive director of capital transactions group at Knight Frank India.

Meanwhile, better market outlook is prompting Milestone Capital to look at introducing a domestic commercial fund this year to deploy rent-earning pre-leased assets, of around Rs 1,000 crore.

“Assets are available at attractive valuations. With interest rates in a low range, higher capital appreciation is possible. We are already evaluating a few deals for investment,” said Rubi Arya, executive vice chairman of Milestone Capital Advisors.Milestone Capital is working also on exits worth Rs 700 crore, including Rs 500 crore from commercial assets in the next one year in the backdrop of a recovering office property market.

Source: http://economictimes.indiatimes.com/articleshow/52368876.cms

PE inflows from foreign funds in real estate up 33%

Total private equity investments from foreign funds in Indian real estate increased 33%, from $1,676 million (around R11,306 crore) in 2014 to $2,220 million (around R14,974 crore) in 2015, according to latest findings of global real estate consultancy Cushman & Wakefield.

 

Owing to high property prices and high investment potential, Mumbai was accounted for about 35% of the total foreign investments in 2015, followed by Delhi NCR accounting for about 25% of the investments.

Sanjay Dutt, managing director, Cushman & Wakefield India said, “The three large cities; Mumbai, Bengaluru and Delhi-NCR continue to attract the highest investments in India and account for about 75% of these investments.

However, with government initiatives to de-stress these cities, relaxed FDI norms and focus to improve infrastructure across the country, other cities in India are likely to witness rise in PE investments going forward.”

The structured debt deals accounted for almost half (49% in value terms) of the total PE investments in 2015.

The structured deals strategy, though moderated due to increased competition, offers returns in the range of 15% – 17% to its investors.

Source: http://www.financialexpress.com/article/industry/companies/pe-inflows-from-foreign-funds-in-real-estate-up-33/221723/