Build a Competitive Warehouse Sub Sector an India Perspective Case Study of Mumbai

Build a Competitive Warehouse
Sub-sector – An India Perspective
Case study of Mumbai
Presented by Dr. Samantak Das
Chief Economist and National Director Research
Knight Frank India

What are the Investment Avenues?
Real Estate

Commodities

Currency
Investment
Avenues

Bonds

Equity

Where to Invest in Real Estate?


Real Estate
Investment

Office

Residential

Land

Industrial

Retail

Warehousing

Pre-leased &
Occupied

Underconstruction


Hotel

Agenda
Logistics & Warehousing
in India

Policy Analysis

Business model dynamics

Infrastructure

India Logistics & Warehousing

Emerging Trends

Bhiwandi
Mumbai Warehousing
Market

Panvel

OVERVIEW

5

What does Logistics mean?

Evolution of Logistics in India
 Processes like
purchasing,
warehousing,
packaging and
inventory
management
handled separately
 Not much
coordination
between functions


Early

 Greater external
 Internal
integration
integration within
 Bundling of
the company
China services with the
 Better
help of 3PL players
coordination
 Companies focus
between functions
on core
 Individual
competencies and
contracts given for
outsource logistics
transporting,

requirements to
storage,
3PL Players
forwarding etc.
 World class
 Shift from
warehouses ,
godowns
India
higher automation
to functional
warehouses

Growth

Consolidation

USA
 Strategic focus on
reducing cost

redundancies and
customers
 Supply chain
management
 Global operations
 Single operator
managing the
supply chain in
multiple
geographies
 Move towards
4PL’s and 7PL’s

Mature

Comparison with USA & China



The USA logistics sector has a value of almost 10 times that of the Indian logistics

sector.



Yet the USA logistics sector employs only one-tenth the number of people that the
Indian logistics sector does

Comparison with USA & China
India

USA

China

9.9
4.3
(43% share)
J.N.P.T.

42.9

7.9
(18% share)
Los Angeles

139.7
31.7
(23% share)
Shanghai

Road Network
Weight of Goods moved annually per km of road

4.8 mn. km
1,173

6.5 mn. km
1,727

4 mn. km
7,018


Rail Network

64,000 km

228,513 km

66,239 km

14,750

8,293

59,331

Total containers handled at ports (mn.TEU)
Containers handled by busiest port (mn. TEU)

Weight of goods moved annually per km of rail line


The busiest port in India handles more than 43% of the country’s total traffic as opposed to
the busiest ports in the USA and China that handle 18% and 23% respectively
Indian cargo is inefficiently clustered around a few main ports

Demand Drivers of Logistics Sector
Demand drivers of
logistics sector

Manufacturing

Consumption

Exim

Based on industrywise spending on
logistics

Based on modern
retail space


Based on
container traffic

Major industries
such as Auto,
Cement, FMCG,
Metal and Textile
among others

Major
consumption
centres such as
Mumbai, NCR,
Bengaluru and
Chennai among
others

Major ports like
JNPT, Chennai,
Kandla, Mundra
and Ennore
among others

Manufacturing Led Demand
Industry

Characteristics


Automotive and
Auto Components






FMCG







Textile







Cement





Pharmaceutical





Highly logistics sensitive
Timely supply of individual components is of utmost importance
Inventory carrying cost is high
Highly dependent on skilled labor
High amount of inventory holding
Emphasis on last mile connectivity
Focus on product packaging
Complex supply chain
Extensive distribution network
Requires containerised cargo
Sensitive to timely movement of raw materials
Contributes to exports as well
High volume, low value commodity
Logistic cost comes very close to the manufacturing cost
High dependency on good transport infrastructure
Requires specialized cargo, temperature sensitive
Highly time sensitive
Huge inventory
Drugs need to reach the market in time

Logistics cost as
a % of revenues

2% - 3%

6% - 8%

4% - 5%

18% - 20%

2% - 3%

Consumption Led Demand


The changing dynamics of the retail industry has resulted in the business model of a

modern retailer becoming heavily dependent on a smooth and efficient supply chain
network



Large consumption markets like the NCR, Mumbai,
Bengaluru, Chennai and Kolkata among others require
massive amount of investment in logistics in order to
ensure an uninterrupted supply of goods



This has created demand for logistic services like
warehousing, last-mile connectivity and inventory
management

Major consumption markets

EXIM Led Demand



Export-import market constitutes the largest demand driver for the logistics sector in India



India’s containerised traffic in TEUs has grown at an annual average growth rate of 11% in
the last ten years fuelling robust demand for logistic services such as cargo transport, ICD
and CFS

Warehousing Space Demand


The total warehousing space demand in India is expected to grow at 13% CAGR over the

next 5 years


Manufacturing led demand is expected to lead with a 15% CAGR



A total of 235 mn.sq.ft. of incremental warehousing space will be required by the end of
2018 or 47 mn.sq.ft. in each of the coming five years

Demand for warehousing space in India (mn.sq.ft.)

2013

2018E

CAGR

Incremental
Demand

Incremental Average
Annual Demand

Manufacturing

29

57

15%

28

6

Consumption
Exim
Total Warehousing

52
211
291

84
386
526

10%
13%
13%

32
174
235

6
35
47

Major Warehousing Hubs in India

STRUCTURE & BUSINESS
MODEL

16

Types of Warehousing Services
Type of warehouse

Type of products handled

Location
Near ports & major industrial/railway
hubs

ICD/CFS

Containerised cargo

Rail side warehouse

Break bulk cargo such as Cement, Fertilizer

Major consumption centres & port

Bonded warehouse

Imported goods

Near ports & major industrial areas

Retail distribution centre

Retail & consumer products such as FMCG
goods, apparels, consumer durables

Major consumption centres

Service parts distribution
centre

Spare parts & consumables of heavy capital
equipment/machinery

Major industrial centres

Industrial warehouse

Industrial goods which are used as inputs in
other manufacturing industries

Major industrial centres

3PL warehouse

Multiple products

Major industrial & consumption centres

Godown

Multiple products

Major industrial & consumption centres

Cold storage warehouse

Frozen foods, milk products, pharm products

Major consumption centres & port

Foodgrain warehouse

Foodgrains such as rice, wheat, sugar

Major agricultural hubs

Air cargo warehouse

Time sensitive high value items, fragile products Major airports

Construction Cost of Warehouse


The nature of cargo handled by the occupier determines the choice of structure



PEB structures offer relatively more vertical storage space and are preferred by occupiers
making use of pallets and fork lifts for the purpose of stacking cargo



High value fragile cargo may not prefer multiple levels of stacking and would prefer an
RCC warehouse



Similarly, occupiers who need climate control, for instance pharmaceuticals, prefer RCC

Cost components for construction of a warehouse (Rs./sq.ft.)

Cost component

PEB

RCC

Structure

350 - 450

400 - 500

Plinth/flooring

300 - 400

300 - 400

Infrastructure (Sewage, roads, boundary wall, etc.)

150 - 350

150 - 350

Total

800 - 1200

850 - 1250

Feasible Land cost & Infrastructure


The variability of the construction cost is marginal across locations. It is the land cost that
determines the economic viability of a warehouse



The ideal land cost for a warehouse project would be around Rs.200/sq.ft. and with
ground coverage of 50%, this translates into Rs.400/sq.ft. on a built-up area basis



Support infrastructure such as sewage treatment plant, adequate internal roads for truck,
boundary walls, parking space, security chamber, etc. require open space



We estimate a minimum of 30 acres or 650,000 sq.ft. built-up area as the ideal size of a
warehouse



Hence, investment of approximately Rs.780-1,072 mn. would make an ideal warehouse

project in India


Land: Rs.260 mn. & Development cost: Rs.520-812 mn.

Return Expectation & Rental Yield


Based on the associated risk, organised/institutional players expect IRR of 14-16% from a

warehouse development project


On the other hand, unorganised players underwrite warehouse development projects for
as low as 7-10% IRRs



The gross rental yield for a warehouse ranges from 10-12% pa



However, the rent earned will be subject to outgoings on account of CAM charges,
property taxes, leasing/marketing fees, insurance cost, etc.

POLICIES & REGULATIONS

21

WDRA Act: Salient Features
Increase
investments in
warehousing
Enhance
business
opportunity for
Banks and
Insurance

Enhanced
employment
opportunities

WDRA 2007

Farmers
seeking higher
prices and
accurate
weights

Facilitates
borrowing and
hedging for
the owner
Banks
advances
backed by
secured and
easily
liquidated
collateral

Free Trade and Warehousing Zone
FTWZ benefits

Infrastructure
benefits

Fiscal and regulatory
benefits
i)
ii)

Tax benefits
Excise duty
exemptions
iii) Duty deferment
benefits

i)

Single product
storage facilities
ii) Shared
warehousing
iii) Equipment
sharing

Administration
benefits

i)
ii)

Delivery time
Support facilities
and effective
management

Other benefits
i) FDI inflow
ii) Export oriented
iii) Employment
potential
iv) Industries
competitiveness

GST & its Impact


GST will ensure the abolition of CST thereby making the country a single market which will

no longer be divided by state boundaries


This will enable a reduction in the number of warehouses and allow companies to focus
on building fewer and more strategically located warehouses



Supply chains will become leaner and efficient in terms of warehousing, transport routes,
distribution and sourcing wherein the decisions taken will be based on operational
efficiency rather than tax avoidance mechanism

Subsumed under Central GST

Subsumed under State GST

Central Excise Duty

VAT / Sales tax

Service Tax

Entertainment tax

Additional Customs Duty

Luxury tax

Surcharges

State Cesses and Surcharges

Cesses

GST & its Impact

EMERGING TRENDS

26

MMLH: The Future of Logistics Sector

Warehouse

Godown

Integrated
Logistic
Park

Multi Modal
Logistic Hub

Leading Global MMLHs
Multi Modal
Logistic Hub

Country

Size (Acres) Major services

Alliance Texas

USA

17,000

Plataforma
Logistica de
Zaragoza

Spain

3,200

Società Interporto
di Torino

Italy

740

Euro Transport
Centre

Germany

585

GLP Park Beijing
Capital Airport

China

100

Air cargo airport, rail access, Foreign Trade Zone
(FTZ), Inventory tax exemption, Dedicated office and
retail space
Air cargo airport, rail access, Business park, Captive
electrical substation
Rail access, Supply chain management, Traffic control
cent es, P e‐p oduction & uality cont ol, Office,
Banks, restaurants, Workshop centres
Rail access, customs clearance, Duty-free storage,
Just-in-time scheduling, Cross-docking centre, Spare
parts logistics centre
Air cargo terminal, Express centre, Customs
clearance, Bonded & non-bonded warehouses

MMLHs along the DMIC
• The GOI through the DMICDC has identified four

locations in its initial stage that are to be developed
as MMLHs
• The proposed MMLHs are located in Dadri &
Rewari near the NCR, Pithampur in Madhya
Pradesh and Karla near Pune in Maharashtra
• Although these hubs are still at the pre-feasibility stage, the intent of developing
them in the coming years indicates the direction in which the logistic sector of the
country is heading

MUMBAI

30

Introduction
• MMR constituting Mumbai, Thane and Navi Mumbai has the highest density of
population amounting to 23.5 mn.
• The region is host to two major sea ports namely the JNPT and the Mumbai Port

• Hence, the warehousing activities in the city are either consumption driven or
EXIM driven
• The city does not have a manufacturing base and as a result manufacturing led

warehousing is non-descript here

Major Warehousing Clusters

Bhiwandi Warehousing Hub

33

Types of Warehouses and Industries
Serviced

Retail distribution centre

FMCG

Consumer
Durable

Retailers

Textiles

Pharma

Pepsi, Henkel,
Reckitt
Benckiser, HUL

Samsung,
Videocon,
Phillips, LG,
Toshiba

Tesco, Croma,
Future Group,,
Hypercity,
Flipkart

Raymond,
Peter England,
Pepe Jeans

Cipla, GSK,
Novartis,
Wyeth

Location
Delhi-Mumbai
Highway (NH-8)

Mumbai-Nashik
Highway (NH-3)

NORTH-WEST

NORTH-EAST

Bhiwandi
Warehousing
Hub

SOUTH-WEST
Thane & Mumbai
City

SOUTH
Navi-Mumbai,
JNPT & MumbaiPune Highway

Connectivity
The Bhiwandi warehouse cluster is located in close proximity to the densely
populated (23.5mn.) consumption markets of Mumbai, Thane and Navi Mumbai

Approx. Distance (Km)

Approx. Transit time
(Hours)

Mumbai city (Dadar)
Thane city
Navi Mumbai (Vashi)
JNPT Port
Mumbai Port

35
10
25
50
45

1-1.5
0.5-1.0
1-1.5
1.5-2
1.5-2

Mumbai International Airport

30

1-1.5

Location

Rent and Quality of Warehouses
Bhiwandi Warehouse Hub
Indicator

Unit

Land rate

INR/acre

Land rate

INR/sq.mt.

Rent

INR/sq.ft./month

Range
15,000,000 - 40,000,000
3,700 - 9,900
9 - 15

Warehouses on Old Agra Road


Most warehouses are old developments with G+1 RCC structures which provide for just
12-14ft. of vertical space for storage



Primarily dominated by occupiers from textiles, pharmaceutical, consumer durables



The rental here is Rs.9-12/sq.ft./month for ground floor and Rs.4-6/sq.ft. for the first floor

Rent and Quality of Warehouses
Warehouses on Mumbai-Nashik Highway (NH-3)


Warehouses along the NH-3 can be categorised as modern warehouse complexes with
sizes in excess of 1 mn.sq.ft



Warehouse parks of PEB structures with supporting internal infrastructure can be found
along this 20 km stretch from Mankoli to Padgha Toll Naka



The rent here is on the higher side and ranges between Rs.10-15/sq.ft./month because of
better quality of construction and supporting infrastructure such as sewage treatment
plant, adequate internal roads for truck and trailer movement, fire fighting equipment,
parking and security

Infrastructure
• The Bhiwandi warehouse cluster came up as an unplanned development with

projects being developed in village areas between Thane and Bhiwandi
• As a result, the infrastructure development in terms of roads, water, sewerage
and power was lagging
• This has improved in the last few years with the development of Old Agra Road
into four-lane with divider and privatisation of power supply (Torrent Power)
• The 20 km. stretch from Mankoli to Padgha Toll Naka on NH-3 has attracted a
large number of warehouses because of the well-built four-lane national highway

Competitive Advantage
• Proximity to the densely populated consumption hub of Mumbai, Thane and

Navi Mumbai
• Lower rentals in comparison to competing warehousing hubs like Panvel
• Abundant supply of skilled, semi skilled as well as unskilled workers from MMR
• Proximity to the country’s largest container port Jawaharlal Nehru Port Trust

(JNPT) as well as the Mumbai Port

Challenges
• Identifying land parcels with clear land title
• Tiny and scattered land holdings with multiple owners from nearby villages
• Land use gradually changing in favour of residential development
• Warai charges paid to the local labour union increases the total cost by 5%-20%

• Presence of a large number of unorganised players with return expectations as
low as 7-10% makes it difficult for institutional players to operate in this market
• Lack of clarity in development norms

Outlook
• Small standalone godowns will be shunned in favour of large warehouse parks

with support infrastructure and utilities
• With residential development emerging as the most remunerative option for land
development, new warehouse development will shift towards the 15 km. stretch
extending from Rajnoli (junction of NH-3 and Bhiwandi Kalyan Road) to Padgha
until the toll point

• Besides land availability, this stretch has good road connectivity with the MMR
consumption centre and low viability for residential development

Feasible Land Cost
Feasible land cost matrix for warehousing in
Bhiwandi (INR mn./acre)
2%
3%
Expected rental growth per annum
4%
5%

Investor Return
12%
14%
16%
10
8
7
13
11
9
15
13
11
18
16
13

Market Congruence case (The output from the feasible land cost matrix that
matches with the prevailing market price of land)

• The market price of land in this hub is upwards of INR 15 mn./acre
• Institutional players with a return expectation of 16% have no business case
for operating in Bhiwandi

Panvel Warehousing Hub

44

Types of Warehouses and Industries
Serviced
Types of
warehouses

Industrial
Warehouse
Chemicals
BASF, Dow,
Dupont,
Monsanto

Consumer
Durable
Dell, Godrej,
HCL, Hitachi,
HP, LG, Nokia

Container Freight
Station (CFS)

Pharma

Engineering

Cipla, Lupin

Crompton
Greaves, Voltas

Location
NH-8, NH-3 and
NH-222
NORTH

JNPT Road

WEST

Panvel
Warehousing
Hub

SOUTH
Panvel-Goa
Highway (NH-17)

SOUTH-EAST
Mumbai-Pune
Highway (NH-4)

Rent and quality of warehouses
Warehouses on Kalamboli-Taloja region


Most warehouses are G+1 RCC structures or PEB structures with basic infrastructure



These warehouses cater to low value products from the pharmaceutical, consumer

durables, metals and textile industry


The rental here is in the range of Rs.12-15/sq.ft./month

Rent and quality of warehouses
Warehouses close to Palaspe Phata


Logistics parks with integrated solutions



State of the art construction quality with high ceilings (30-35 ft.), climate control, sewage
treatment plants, adequate security and internal roads



The rent here is on the higher side and ranges between Rs.16-26/sq.ft./month depending
on the distance from the JNPT port

Indicator

Unit

Land Rate

INR/acre

Land Rate

INR/sq.mtr.

Rent

INR/sq.ft./month

Range
15,000,000 - 65,000,000
3,700 – 11,120
12 – 26

Infrastructure
• All the major national highways are in excellent condition
• However, internal roads are in poor condition and are difficult to negotiate
• Absence of dividers on majority of the two-lane internal roads cause frequent
traffic jams and delays
• Power, water and sewerage relatively better than Bhiwandi warehousing hub

Competitive Advantage
• Proximity to India’s busiest container port
• Easy access to a number of national highways
• A large portion of the area falls under CIDCO which has aided in building
sustainable infrastructure
• Abundant availability of skilled and unskilled labour in Navi Mumbai and the

absence of specific local labour issues (eg. Warai charges)

Challenges
• Paucity of contiguous land and inaccurate land records pose challenges in

identifying viable land as well as authentic land titles
• Announcement of the Navi Mumbai airport has led to Panvel and its
surrounding locations being touted as the next big residential hub
• Prices in residential projects within a 3 km. radius of Palaspe Phata have already
crossed INR. 5,000/ sq.ft.
• This has rendered warehousing development at existing rentals unviable in
locations close to Palaspe Phata

Outlook
• Increase in capacity of JNPT from 3.8 mn. TEUs to 10 mn. TEUs by 2016 will

lead to a surge in warehousing activities in the Panvel cluster
• With residential development emerging as the most remunerative option for land
development, new warehouse development will move further south on the NH-4
and NH-17
• Locations like Patalganga and Khalapur on the Sawale Apta road, Nadhal

Khalapur stretch on the NH-4 and the Khopoli-Pen Road will witness maximum
amount of new development in the coming years

Feasible Land Cost
Feasible land cost matrix for warehousing in
Rasayani-Patalganga (INR mn./acre)
2%
3%
Expected rental growth per annum
4%
5%

Feasible land cost matrix for warehousing on the
Nadhal-Khalapur stretch and Pen-Khopoli Road on
NH-4 (INR mn./acre)
2%
3%
Expected rental growth per annum
4%
5%

Investor Return
12%
14%
16%
21
18
16
24
21
18
27
23
20
30
26
23

Investor Return
12%
16
18
22
25

14%
13
16
18
21

16%
11
13
16
18

Market Congruence case (The output from the feasible land cost matrix that
matches with the prevailing market price of land)

Key Takeaways
• India logistics sector is in a ‘growth’ phase – strongly moving towards the

‘consolidation’ and ‘mature’ stage through a holistic approach
• Efforts are being taken to reduce transportation and warehousing costs and
better utilization of port to make the logistics sector more efficient
• Warehousing sector is expected to witness a substantial improvement backed by
policy & regulations, fiscal incentives and planned industrial & dedicated freight
corridors
• GOI has already identified four locations to be developed as MMLHs

• Total warehousing space demand in India is expected to grow at 13% CAGR
over the next 5 years – incremental demand is likely to be 235 mn.sq.ft.