A. STRONG DEMAND DRIVERS
* India faces a fundamental lack of Grade A warehousing with only 88MM sft of Modern (Grade A) warehousing stock. Meanwhile, China in the last 15 years has grown to 750MM sft of Grade A warehousing stock directly corresponding to the increase in per capita income. This growth commenced once China crossed the $2000 per capita income mark (where India is currently at).
* Industry already pegs Grade A supply to grow at (pre-COVID) a y-o-y growth to be ~25%. We estimate that with the impact of COVID-19, the y-o-y growth rare will need to increase by ~10% to meet additional unmet demands. This is due to the following factors:

1. Accelerated Adoption of E-Commerce / Capacity Building of E-Commerce Players:
 Online grocers like Big Basket and Grofers have seen the demand for groceries and essentials upsurge by 3-5X compared to normal (according to Neilson, in e-commerce, average orders surged for staples with edible oil growing by 106%, salty snacks by 84%, soft drink by 68% and biscuit by 31% on a weekly basis in the last one month, due to the COVID-19 impact).
 The fact that Big basket raised USD 60MM to fund their scaling of business operations, is a clear indicator of the consumer shift towards e-commerce.
 This could be due to panic buying, but some trends from China suggest that there was a 20% sustained demand even after lockdown was lifted.
 Moreover, the transition of retail to online and larger inventories by e-commerce players, will speed up the warehousing demand further. The resulting impact will be felt substantially in demand for inner city logistics and cold chain facilities.
 E-commerce companies are already looking towards expansion: Amazon, USA plans to hire / have hired an additional 175,000 warehouse and delivery workers amid a rise in online orders due to the coronavirus outbreak. We are hearing similar stories from customers in India. Additionally, last week the Amazon Stock price rose by 5.6% to a record high of $2,290 per share demonstrating the confidence of global markets in the E-commerce story.
2. Greater Displacement Demand:
 Companies will prefer Grade A facilities that offer compliance, human safety, hygiene and enable automation and social distancing. We estimate that this will lead to an additional Y-O-Y demand for Grade A facilities by 25% over the earlier predicted demand, even if only 35% of new occupiers switch their preference to Grade A warehouses.
3. Inventory Stockpiling:
 Companies will quickly consider refining their inventory strategy to mitigate risks of supply shortage,by increasing inventory stockpiling. This will create immediate increase in warehousing demand in the manufacturing and consumption hot spots within the country.
 Additionally, soon companies will look at back up storage options in terms of large warehouses in Tier 2 & 3 markets, away from the highest affected Tier 1 cities, to further de-risk their supply chains.

4. Decentralized Demand due to rapid digitization:
 Due to digitization and the new norm of work from home, Companies will be seriously consider diversifying their presence geographically. Offices and workers will potentially re-allocate resources to smaller cities, away from Mumbai, NCR and other metros which have been most heavily affected during this pandemic.
 Due to the above, the re-allocation of the white collared workforce to Tier 2 & 3 cities willsignificantly increase consumption and demand for warehousing. Cities with good infrastructure provisions like Nagpur, Bhopal, and Surat will be the new warehousing destinations of the future.

5. Agri Warehousing, the non-E-commerce scale:
 Indian agricultural warehousing will be tested in the coming months, even as the expected slowdown in the economy and concerns related to liquidity will hit the farming and trading community at a time when India is about to harvest a bumper crop. The duration of storage of commodities in warehouses will take a longer time than usual, and scarcity of agricultural warehousing space will be seen in the coming months, creating a huge demand.

 As per industry estimates, the cold storage capacity itself needs to be increased by at least 40% (pre-COVID numbers). The emphasis on increasing this capacity will be foremost within the government purview – making it an attractive proposition for private investors.
There are concerns that there will be reduced consumption which will affect the overall warehouse
demand. 2 factors to note here are:
1. Category Shifts:
 Essentially consumer preferences will shift to less expensive categories. Thus, even though there might be an overall loss of GMV (Gross Merchandising Value), consumption for non-durables and essentials will remain largely unaffected. Impact will be felt more on large discretionary spending.
2. Pent-Up Demand:
 Most economist feel that there is enough pent-up demand post lockdown, which will be met through e-commerce rather than offline retail channels.Our understanding is that both category shift as well as transition to online channels, will have a direct positive impact on warehousing.
B. SECTOR READINESS
Unlike other real estate asset classes, the warehousing sector is fully prepared and matured to be able to scale and take advantage of the increase in demand due to the following factors:
1. Mature Policy Initiatives
 GST implemented.
 Infrastructure status: Department of Economic affairs has given infrastructure status to Warehousing giving access to infrastructure lending at easier terms and enhanced limits.
 100% FDI in Warehousing and logistics to attract funds and incentivize domestic investors into the sector.
 Warehousing state level policies fully matured (e.g.: IIA & ILP in Maharashtra and Warehousing policy in NCR etc.).
2. Emphasis on Infrastructure:

 Major road and freight corridors are already underway which will boost throughput (e.g.: DFC, KMP,DMIC amongst others).
 Indian warehousing is now in line with global benchmarking for Grade A specifications as opposed to 5 years back.
3. Low Credit Risk:
 Within Real estate, there is a challenge in sourcing funds with the reduced numbers of NBFCs and high stress on the prop books of the operational NBFCs.
 The warehousing sector is however, insulated from credit risks, unlike other real estate sectors. It has no linkages to NBFCs, no notable NPAs, no Debt Pileups and exceptionally low vacancy.
 Significant presence and willingness of organized institutional, long term PE and LP capital.
 Low conversion and approval risk (as a 100-acre site comes under one approval whereas in commercial and residential, the same can be building wise and floor wise) which gives additional comfort to lenders.
 Construction cycles, turnaround time and low execution challenges lead to lower credit risks.
 This low credit risk will further add to favorable and preferential treatment of the warehousing sectors capability to access capital.

C. SUPPLY SIDE DYNAMICS
1. Distress / NPA:
 NPAs in real estate will increase as valuations will fall by at least 20% in the city centres and between 5-10% in preferred warehousing locations. Developers / Corporates who are over leveraged due to high land prices will take a sizeable hit, leading to availability of distressed assets in certain locations.
2. Slightly Better Returns:
 A land price reduction of ~10% lower along with a cap rate reduction of ~0.5% will result in an IRR jump of ~3% and yield jump of ~0.3%, resulting IRR of ~23%-24%.
3. Reallocation of Capital:
 Post COVID, fund managers will look at warehousing and industrial real estate as a safer, resilient and scalable asset class for their investors.
 Some of the capital already raised for residential, co-living / working, retail and hospitality will look at re-allocating itself into warehousing and the Data center space along with affordable housing.
D. MACRO-ECONOMIC FACTORS / BIG PICTURE/ LONG TERM
There is a reduced confidence in the Chinese eco-system. In case European and American Corporations want to de-risk from China they have 3 options: South America, East Asia and India. In South America,Brazil is a viable option. However, it faces its own issues with occasional mis- governance and hyperinflation. East Asia, Vietnam, Cambodia, Thailand are smaller countries with limited long-term opportunities. India thus, emerges as the only viable option, with a large English speaking & educated population, and with reasonable law and order in place.
When we move forward into the Post-COVID era, it is conceivable to think that the government will leave no stone unturned to lure these multinational corporations for India to become a preferred destination for manufacturing. This will include more relaxed labor laws and easier import-export terms. This is the only way the government will be able to employ our large educated demographic. Given this scenario,with any export / manufacturing impetus – warehousing will become a necessity.

E. CONCLUSIVE SUMMARY
Even though there will be a short term dip in consumption demand over the next 6-9 months, combining all the above factors: category shifts, accelerated E-commerce demand, displacement demand, inventory stockpiling, increase in demand for agri-warehousing and a more decentralized consumption footprint -there are clear indicators that the warehousing sector will witness a boom. Furthermore, land buying/supply creation is a time-consuming process which would most likely collide perfectly to suit the timing of the demand upswing This will be enabled by the fact that the sector is prepared and ready with policy,infrastructure initiative and credit lines in place.