How will warehousing and manufacturing sectors shape up post pandemic

Even though there has been a dip in the Indian warehousing and logistics sectors due to the Covid-19 pandemic, they are well-positioned to bounce back post the pandemic. But how it would look it like or what are the factors influencing the industry in a post-pandemic world.

Srinivas N of international property consultant Savills writes down the developments in the manufacturing and logistics sectors of the country while noting that the growing demand for cold chains, pharmaceutical warehouses, growth in e-commerce, organised retail and the government’s policy support are likely to drive warehousing demand in 2021.

The Industrial and logistics sector is evolving to adjust to the new normal. The new reality taking shape after the second wave of Covid-19 is made of uncertainty, complexity and opportunities. To adapt and thrive, the industrial & logistics sector is working towards becoming resilient and agile.

The pandemic-led shutdowns during the first wave caused a significant dip in the manufacturing sector. The market had an upbeat sentiment in the early weeks of 2021, but the turn of events after the second wave created an atmosphere of uncertainty again.

Since a third wave has not been clearly projected at this stage, there is some optimism regarding market recovery. Businesses are expected to bounce back on the strength of advancing vaccinations in the months ahead.

In H1 2021, top-8 cities of India witnessed absorption of 22.4 million sq. ft of industrial and warehousing space against 20.6 million sq. ft for the whole year 2020, driven by robust growth in e-commerce, 3PL and manufacturing sectors as well as rising demand in emerging tier II and tier III cities.

On the supply side, despite construction activities getting affected due to the lockdown, the top-8 cities of India witnessed a fresh supply of 20.6 million sq. ft in H1 2021 against 22.5 million sq. ft for the whole year 2020. NCR accounted for 35 percent of the total supply witnessed in H1 2021 followed by Mumbai (21 percent), and Pune (13 percent). The overall industrial and warehousing space stock stands at 250 million sq. ft and vacancy levels at 7.1 percent as of H1 2021.

In our outlook post-second wave of Covid-19, we look at the future of the industrial sector and outline some trends that will shape the segment in time to come. Growing demand for cold chains, pharmaceutical warehouses as well as growth in e-commerce and organised retail are likely to drive warehousing demand in 2021. In addition, strong macro-economic fundamentals and the government’s policy support in implementation will continue to fuel growth for the entire sub-asset class of industrial & logistics.

Manufacturing sector
While business sectors have suffered a severe slump owing to the pandemic and subsequent lockdown, the outlook for the manufacturing sector is bright. It is seen as the new sunrise sector which is set to benefit as MNCs seek to diversify their manufacturing locations.

The two waves of the pandemic and the recent reforms announced by the government have introduced a major transformation of the manufacturing sector. The FDI relaxations, government spending on the creation of supporting infrastructure, incentive schemes, subsidies and continued availability of skilled labour have significantly boost manufacturing and allied sectors.

To further push domestic manufacturing, the government slashed the corporate tax rates of new manufacturing companies to 15 percent. It is the lowest in South East Asia. Further, various government schemes such as the production-linked incentive (PLI) scheme of approximately ?2 lakh crore aim to significantly boost manufacturing and allied sectors.

The government has also identified large land parcels that could potentially be offered to new manufacturing firms. Hence, many companies pursuing production plans in the country.

Government initiatives and support to growing sectors such as leather, toy, electronics goods, pharmaceuticals & medical devices, electric vehicles, solar PV, textiles, capital goods and chemicals are likely to make India a global manufacturing destination.

In addition, improvements in ease of doing business, along with Goods and Services Tax (GST) and low labour costs, are also encouraging foreign firms to enter India. Many industries from overseas entering India are exploring joint ventures, partnerships and asset acquisitions.

The forecast is an inflow of sizable investments into the country in 2020-21 from MNCs and hence, the emergence of India as a global manufacturing destination.

Logistics and warehousing sector
Even as we have seen a temporary blip in its growth story due to the ongoing pandemic, India’s warehousing and logistics sectors are well-positioned to bounce back post the Covid-19 pandemic.

The growth of the manufacturing sector is creating unprecedented demand for warehousing spaces across Tier-II and Tier-III cities such as Coimbatore, Nagpur, Vizag, Indore, Guwahati, Ahmedabad, Surat, Lucknow and Jaipur. Existing growth potential, the government’s clear strategy and India’s cost advantage are helping attract sizeable foreign investment into the manufacturing sector and thereby into logistics and warehousing.

The Work From Home (WFH) and social distancing norms have further fuelled the e-commerce demand and therefore the growth of the logistics and warehousing sector. While supply chain and distribution of non-essential items have suffered as the country reeled under stringent lockdowns, the demand for household essentials and pharmaceuticals has not seen a slowdown. The sector is also benefitting from the exponential increase in demand for online retail services.

In terms of investment, logistics and warehousing offers more stable income streams and lower capital expenditure. Hence, post the pandemic, the sector will continue to grow in its appeal to global investors as a stable and secure asset class.

Overall, the logistics and warehousing sector will continue to grow, backed by the e-commerce boom, increased number of third-party logistics, improving infrastructure and freight corridors. Investments in the form of debt funding, equity investments in rental yielding assets, and entry of new global and sovereign wealth funds can be expected in 2020-21.

Industrial and logistics properties, especially warehouses, have been at the top of the investors’ list for a while now. The sector will continue to tap into megatrends such as the growth of e-Commerce and every market in the region is undersupplied with modern logistics space.

Srinivas Nanjundaswamy is the managing director of industrial & logistics at the professional property consulting firm Savills India

The views and opinions expressed in this article are those of the author and do not necessarily reflect the views of Indian Transport & Logistics News.