Torbit Alternate Realty

Warehosing : Low on Investment, High on Absorption

Despite global headwinds hitting the investments,the sunrise sector of warehousing continues to follow a growth path which is clearly reflected through substantial increase in absorption.

The year 2023, according to a recent report by Vestian, the warehousing sector had an absorption of 37.8  million sq ft, 21 percent  higher, compared to the previous year. Absorption has been on the rise since 2021, increasing gradually year over year. Despite dried-up investments in 2023, absorption surpassed pre-pandemic level of 2019 by 15 percent.

The sector received investments worth USD 646 million  in 2023, accounting for 15 percent of the total institutional investment received in the real estate sector. However, investments declined by 65 percent in 2023 over the previous year as investors opted for wait-and-watch mode amid global macroeconomic uncertainty.

Yearly Absorption Trend

Source: Vestian Research

In the past decade, 3PL companies emerged as a preferred choice for several businesses as these companies can optimize cost along with providing flexibility to their clients in case of demand uncertainty. As a result, the share of 3PL companies increased over the years and reached 44 percent of the overall absorption in 2023, followed by engineering and manufacturing companies with 18 percent share. Retail accounted for 11 percent of the overall absorption in 2023.

Sector-Wise Absorption (million sq ft)

Source: Vestian Research

Mumbai contributed the highest to the overall absorption in 2023 with 27 percent share. Its share has increased from 19 percent  a year earlier. In absolute terms, absorption increased by 69 percent in the city, reaching 10.2 million sq ft in 2023. Heightened real estate activities during the year resulted in an annual appreciation of 4 percent in rentals.

On the other hand, Kolkata witnessed the highest annual decline of 23 percent, reaching 1.6 million sq ft in 2023. Its share has also declined from 7 percent in 2022 to 4 percent in 2023. Limited availability of Grade A warehouses in the city posed a challenge in meeting growing demand, leading to a decrease in absorption. Moreover, restricted absorption activities in the city during 2023 exerted pressure on rentals, resulting in an annual decline of 5percent.

Absorption increased by 21percent in NCR compared to the previous year, however, its share in the total absorption remained constant. The city’s strategic location and thriving e-commerce markets were major demand drivers. Robust demand for warehouses in the city resulted in an annual appreciation of 2percent in rentals.

Pune registered a substantial annual growth of 35 percent in 2023, reaching an absorption of 7.0 million sq ft. This growth can be attributed to the presence of trade hub of Chakan MIDC, which hosts large manufacturing and logistics parks.

The southern cities (Bengaluru, Chennai, and Hyderabad) collectively contributed 27 percent to the total absorption in 2023, after reporting a decline from 34 percent share in 2022. In absolute terms, absorption decreased by 5 percentin these cities, reaching 10.2 million sq ft in 2023.

According to Shrinivas Rao , CEO, Vestian, the   Union Budget 2024-25 is expected to set the tone for next couple of years. “Recent announcements of infrastructure development in the interim budget may have a positive impact on the sector. However, 2024 can be a challenging year for Indian warehousing sector as investments were on a downward trend in 2023.”

The sector is expected to expand at a CAGR of 10 percent -13percent for next couple of years, predominated by third-party logistics and e-commerce enterprises. Grade A facilities are likely to be in demand due to their efficient and cost-effective methods.

TORBIT COMPANY UPDATE/ PHOENIX MILLS 

Strong Growth Aided by New Malls

Riding high on retail space expansion, Mumbai-based Phoenix Mills has registered substantial growth in retail rental income and impressive  growth  in revenue. Going forward, considering the expansion plans of the company, Phoenix Mills offers positive prospects.

Phoenix Mills , according to a report by Motilal Financial Services, reported a revenue of Rs 9.8 billion, up 44 percent YoY, driven by the contribution from four new malls totalling 4 msf . The revenue for 9MFY24 stood at Rs 26.7 billion, up 40 percent YoY. Retail rental income increased by 33 percent YoY to Rs 4.4 billion.In October 2023, Phoenix opened a new mall in Hebbal, Bengaluru (Mall of Asia) . Its Phoenix Grand Victoria in Kolkata and Surat Mall are now expected to commence operations by the beginning of FY28.Aided by densification of existing malls, consumption growth and rent escalations, 14 percent CAGR in rental income over FY 24-26.

The company has shown a strong show in the hotel segment , with total income for the hospitality segment increased by 24 percent YoY, driven by a sharp improvement in the performance of Marriott Agra Hotel having a margin of 37 percent and St Regis clocking a margin of 46 percent . Occupancy remained steady QoQ at 82 percent for St. Regis and increased to 84 percent for Marriott Agra.

The office segment has also given a creditable performance.    Phoenix reported 0.1 msf of net leasing in 3QFY24, taking the occupancy to 71 percent. Total income in 3QFY24 stood at Rs 500 million, up 17 percent YoY. The company will deliver the first phase of the office component at new malls in Pune and Bengaluru, along with the new office block in Chennai, in CY24. This will be followed by a subsequent phase in Pune in CY25. Office rentals are expected to scale up in FY25 and  rental income for office portfolio is expected to increase at a CAGR of 57 percent to Rs 4 billion through FY26.