Burgeoning rents: Does modern warehousing justify it?

With the rise in e-commerce, warehouse rentals across the country have suddenly gone up. Industry veterans share their views on the reason for this sudden jump in rentals, the challenges 3PL companies are facing due to this rise and what they feel about r

Naveen Rawat

Co-Founder, Holisol

Significant reasons for increase in rents are growth in GDP, a growing demand for high-end services and infrastructure, the rising share of organised retail, the proposed GST implementation and of course the emergence of e-retail which alone has contributed to 25 per cent of India’s total demand for warehousing space in 2014.

About the corrections in rentals, I feel demand for high quality modern warehousing space will continue to increase, thereby keeping the rentals stable. Further, demand for low quality warehousing space would gradually come down, resulting in rentals going down in the coming months. Coming to 3PL challenge, we see the strengthening of warehouse rentals more as an opportunity. In India warehousing rental has always been considered as an unnecessary cost and the objective has always been to pay less rental. Such an attitude has resulted in a huge under investment in the sector and in a proliferation of low quality warehousing space.

A well designed modern warehouse with a slightly high rental cost can actually result in lower total warehousing costs. This allows the achievement of higher efficiency and productivity. Strengthening of the rentals will offer developers a fair return on their investment without any need to compromise on construction quality.

Sunil Gauba

Associate Director Facilities & Infrastructure, Flipkart

The main contributors are obviously e-commerce. Lack of authorised warehouse zones has limited the supply, in turn not matching the current demand. Due to this mismatch the takers are not left with much choice but to go with the flow. However, the said trend does not seem to be long term and will change significantly in times to come.

Yes, this sudden jump will get stable but will still be progressive in the long run, keeping in mind the way e-retail is evolving. The most visible challenge for the 3PL companies is obviously the increase in cost.

However, one has to see this increase in cost as an investment which is going to give returns in the long term. With the market still in dynamic stage and getting mature gradually, these challenges will surely prove an opportunity for business.

Bipin Kulkarni

Vice President – Sales & Marketing, Spear Logistics

The growth in e-commerce has spawned growth in real estate, particularly in logistics infrastructure. And e-commerce players are driving a boom in the commercial property space. It is also contributing to the growth of the physical distribution and support infrastructure, leading to a high demand in commercial storage space.

In the logistics sector, the focus has been on fulfilment centres and warehouses, parcel and liquidation centres equipped with state-of-the-art technology and modern warehousing practices. This has resulted in a huge jump in the warehouse rentals in major metros and in smaller cities.

Correction is bound to happen but not in the immediate future, it might happen in the next two years. The bigger players are consolidating their position and trying to be as close as possible to customers with shorter delivery times and more warehouses. Majorly the correction will take place because Hyper Local is still in nascent stage. It will pick up in the next couple of years and will be one of the reasons to stabilise the rentals. Secondly, consolidation is going to take place and lastly, rationalisation of fulfillment cost is going to happen.

When we talk about challenges to 3PL companies due to this jump, warehouse rental consists of 40 per cent of overall warehouse management cost. Due to unreasonable rentals, e-commerce companies try to squeeze 3PL on other components like manpower and warehouse infrastructure and hit on margins.

Further, due to shortage of warehousing space, 3PL has to compromise on the quality of the warehouses and even after paying higher rentals availability of good quality warehouse is a major constrain.

John Thomas

Associate Director, Realistic Realtors

It is true that warehouse rentals and other related costs have increased since last year. With the evolution of e-retail, it can be primarily due to the increase in demand of warehouse along with the lack of modern warehouse which is slowly becoming the need of the hour. These demands are quickly given with the dynamic nature of business. And the requirements being quite specific, this limits the availability.

Undoubtedly, as with every other sudden hike, this jump is surely expected to settle down. With the e-commerce industry getting more mature and the dynamics expected to get more stable, the demands are expected to be more planned. Further, the industry experts visualising the need of more organised warehouses for more profitable and sustainable business, the number of organised and modern warehouses is bound to increase. This in turn will fill the demand and supply gap to quite an extent. The conventional warehouses are the ones which are going to be correct the most in terms of its rentals. The infrastructure developments and other government initiatives to be taken at the state and central level will also play a role.

3PL companies are expected to struggle due to the side effects of the increase along with the competitive business. However, the impact of such increase in the warehouse rental is expected to be minimal to the 3PL companies since in most of the cases the cost is eventually borne by the product companies. In nutshell, though unexpected the said increase in rentals shall encourage the supply of more modern warehouses by the developers and change the dynamics of the warehousing industry for a better future.

Mahinder Aggarwal Vice President –Commercial Luminous Power Technologies

Currently, there is a space crunch everywhere in Delhi and NCR because e-commerce companies are seeking large warehouses everywhere. The scenario is not going to be same in times to come because there is a definite development of eastern and western periphery around NCR. Many properties are being developed around this area and the large warehouses are being constructed. Even in Delhi there are many warehouses which are lying vacant. Though people are asking for high rents but they are not in a position to absorb. So, I don’t see that there will be a very steep increase in rentals. Similarly in places like Bhiwandi and Mumbai, there are large warehouses lying vacant and unoccupied.

There are many logistics companies which have picked up large space but they are not in a position to sell it due to rentals.

Secondly, the high cost benefit will be considered when there is no option available, and people have parallel options. With the introduction of GST, the complete logistics scenario will change. People will move from the smaller places with a large area and where . Cities like Nagpur and Indore are being developed as logistics hub because in both the place rentals are low as compared to Delhi and Mumbai.

Sanjeev Khanna

Head – North, Big Basket

Firstly, there are no defined warehousing areas in most of the cities like Delhi-NCR. So most companies have to go either to industrial areas which are not commercially viable options, or to agricultural areas for warehousing, which don’t have even the basic infrastructure to match the basic requirements.

Secondly, GST is going to change the whole warehousing landscape of the country. With more organised facilities in certain geographically identified areas, the demand will go up but in most of the current agricultural areas, the demand is bound to reduce. These two reasons cause high rentals.

Most of the e-commerce companies themselves don't have a sustainable business model from a longterm perspective. In a couple of years, many of these players won't be able to survive in the market with the kind of losses they are making. The day they pack-off, this overly portrayed demand will normalise and it will be back on track in terms of pricing as the space being built will surely overshoot the demand.

Once the rentals are reduced and the industry starts settling down, only then the 3PL companies will acquire their space to get involved, contribute and grow as an integral part of e-commerce industry.

Prashant Bhatmule

Vice President – Supply Chain, Hindware

The advent of e-commerce, which now accounts for six to 10 per cent of all sales in India, has shaken up the warehousing industry in a big way, leading to an increase in the rentals across the country. The demand of the warehouses near the city has increased due to the need for timely delivery by these e-tailing companies. And as the availability of warehouses in good condition near the city is limited, it leads to higher rentals. Logistics consultants believe that the existing warehouses are old fashioned and more needs to be done to make it online-friendly. We foresee a correction in rentals in the near future but at a small level. On an aggregate level, it is not visible that the rentals would come under control. With such an unexpected increase in warehouse rentals, it is going to be tough to have the space to make the e-commerce business viable.

Rehan Alam Head Network Operations – Express Logistics Division, Gojavas

This sudden jump in warehouse rentals across the country has been experienced recently due to the increased demand by the e-commerce industry. In a general scenario, where real estate industry demands four to six months lead time, these industries demand a faster conversion and are willing to pay the premium. Moreover, the demand for location is always strategic, concentrated on city centres, airports and highway junctions where supply in real estate is limited. This price rise is not expected to last long. The correction will largely depend on the business plans of logistics companies which will also enable projects with larger span of time. A large role here will be played by consumer demand.

Syed Sohel Azmat Deputy General Manager – Logistics DB Schenker

I believe that e-commerce is just one part of the sudden jump in warehouse rentals. Other factors which brought this sudden jump are strong demand for modern warehouses across the country but the supply is low and there are no designated locations for warehousing which results in few developers investing in the projects. I believe the industry will come out of this more strengthened and will harness the benefits of overall increased efficiency.

Due to shortage of facilities there is a momentary increase in the rentals but later on it will be back on track with justified rentals. It would, of course, depend upon the location and quality. There is no big challenge for big 3PL companies because of their economies of scale and they can easily sustain their business. Being a big 3PL player our focus is to provide overall quality services and experience to our customers rather than compromising on the quality of the warehouse.

Ajay Khosla DGM– Sales (NCR) Jaipur Golden Transport

The sudden growth in the e-commerce sector has triggered the demand for warehousing space, only first half of the last year witnessed the requirement of additional space of six lakh sq ft. Changing the mode of operation from traditional to transaction is affecting the size and working of warehouses. Traditional mega shed warehouses are not viable to handle such mass volumes and movements. Another supporting development is that e-commerce companies are opening physical centres and shops in prime areas of cities. Such multi- channel retailing is becoming a new standard but it is a harsh step for planned costs, as these are planned for prime locations of major cities.