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

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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.

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