Competitive pricing can spur 'China plus one' strategy to newer heights

The demand for organized industrial spaces and warehousing facilities is heading northward for quite a while now. Last year saw 24.5 million sq. ft. of industrial and warehousing demand, up eight per cent on a YoY basis -only across the country's top five cities. According to many experts, this clearly reflects that the Production Linked Incentive (PLI) schemes for key sectors that have been announced by the government are paying off and even boosting local production. That's not all. The much-hyped 'China plus one' strategy is also gaining vigour and global companies are keen on shifting their manufacturing focus to India as part of their de-risking strategy.

If one goes by a recent study by Colliers India (the Indian arm of the Nasdaq-listed Colliers) the average quarterly leasing in 2022 remained strong at 6.1 mn sq. ft. compared to the 5.7 mn sq. ft. of the previous year. Third-party logistics players (3PLs) remained the top occupiers of warehousing space, contributing to nearly 44 per cent of the sector's total demand in 2022. Remember, as the consumer demand remains upbeat, 3PL players, E-commerce and retail companies are leasing industrial and warehousing space to cater to this growing demand. Added to that is the spurt in demand for spaces from engineering companies. Improved market sentiments are expected to keep the momentum high.

India's e-commerce growth story can be attributed to the convenience of shopping/returns, improved UPI adoption, omni-channel retailing and the likes. These, in turn, have resulted in a higher demand for more warehousing capacities, especially to augment last-mile connectivity in Tier I and Tier II cities this year. Similarly, the logistics industry's growth can be attributed to its enhanced focus on companies catering to the nationwide change in consumer behaviour.

For the records, during 2022, the demand from engineering and electronics firms surged more than 2X (YoY), while their share in the leasing pie had risen from 13 per cent in 2021 to 28 per cent. Nearly 70 per cent of leasing in engineering and electronics were large-sized deals (more than 1,00,000 sq. ft.) as they ramped up their operations across cities with Delhi-NCR and Pune emerging as the most preferred locations.

Considering these facts and figures, there is no room for doubt that things are looking up.

However, there is a sore point as well. While demand remained robust in 2022, the markets were restricted on the supply front. The 19 mn sq. ft. new supply meant a 20 per cent drop YoY. Developers played it safe and went slow with the new supply as the cost of construction remained volatile during the year. They remained cautious and awaited pre-commitments. Consequently, this led to a drop in vacancy levels despite the robust demand. Overall, the vacancy levels lowered by 2.4pp during the year and stood at 9.4 per cent. With limited new supply, rentals across key micro markets witnessed an increase in 2022, if the Colliers study is a pointer.

Going forward, whether the supply side will remain under check will depend on how the overall economic and business environment pans out. Indian goods can be made more competitive through appropriate pricing of energy and transport.