Warehousing Vs Residential – Which is the more attractive asset class?

by Dhrumil GannaOCT 10th, 2021

Real Estate is one of the most traditional and recognized alternate investment class. Real Estate is broadly divided into Residential (RRE) and Commercial (CRE). CRE further covers various asset classes like warehousing, industrial, office, retail and hospitality.

Traditionally, residential has been a preferred investment class for investors. In the last few years,
E-commerce has grown substantially in India due to various drivers like increasing internet penetration, changing consumer preference, policy support by the Government and improvement in infrastructure. Further, COVID 19 restrictions have further fueled the growth of E-commerce in India. The demand shift coupled with favorable Government regulations has resulted into higher demand of warehousing space from the E-commerce and 3 PL players. More than USD 6.5 Billion has been committed by the institutional investors towards warehousing and investment is expected to grow going further.

We have highlighted below, the key factors that makes warehousing an attractive asset class compared to Residential Real Estate
 ▶ Approvals

The structural design of a warehouse is not as complex as that of a residential project. The average approval time for warehousing ranges from 2-4 months compared to 6-12 months for residential projects.

 ▶ Construction Timelines

Grade A Warehousing structures are Pre-Engineered Buildings, which saves a huge amount of time take for construction compared to a civil structure in case of a residential project. For example, a 5 lac Sq. Ft warehouse building may be constructed and delivered within 15 months compared to a similar sized Residential Project which may take at least 30 months to finish.

 ▶ Complexity of Construction

Warehousing Structure is less complex in comparison to a Residential Projects. Almost all warehouses have similar specifications all over India. However, in the case of Residential Project, the complexity of the structure depends on the type of project, location, unit configurations etc.

 ▶ B2B Business model

Warehousing caters to B2B market. The users of Warehouses are majorly E-commerce players, Third Party Logistics (3 PL) companies and manufacturing entities. In case of a Residential project, the users are mainly individual / retail buyers i.e. B2C market

 ▶ Wholesale nature of business

The nature of warehousing business is wholesale in nature. For instance, 2 lac Sq. Ft of area can be bought by a single user, however, 2 lac Sq. Ft of area in a residential project will have to be sold to a number of users based on its unit configurations

 ▶ Income generating capacity

The income generating capacity of a warehouse is higher compared to a residential project. The end user may invest in a residential project for personal use or expected increase in capital value.

 ▶ Multiple Usage

Warehousing structure can be used for multiple purposes like storage, sorting centre, manufacturing etc. However, this is not the case in case of a Residential project, which can be used for residential purpose only.

 ▶ Stability of Returns

The returns are generally stable due to longer lease period, stickiness of the users and high cost of moving to a new location. In case of residential, the cash flows are unstable due to lesser lease periods and low cost of replacement for the user.

 ▶ Alternate use of land

The land on which warehouse is constructed can be used for other purposes as and when the market scenario changes. For example, warehouse can be demolished to give way to more profitable investment on the land like other commercial asset class or even residential projects. On the contrary the replacement cost of a residential project is very high and extremely difficult due to the parties involved.

 ▶ Exit Profile

The specifications of a warehouse are standard pan India. Hence, the demand is predictable and ensures faster exit. In case of residential project, the exit depends on a number of factors like size, location, unit specifications, amenities, surrounding infrastructure etc.

Based on the above factors, we believe that the warehousing assets are less risky at the Greenfield level compared to a residential project. Further, due to advent of global institutional investors, there has been a surge of warehousing projects all over the country. Given the increase of online shopping and e-commerce, the demand for warehousing will not subside any time soon.