Warburg Venture bets on warehouses as e-commerce booms in India

Embassy Group, an Indian real-estate developer that has partnered Warburg Pincus, has spotted a winner in India’s e-commerce slug-fest: Logistics.

Embassy is looking to build warehouses and industrial parks near eight big cities that can store goods for retail giants as billionaires, including Asia’s richest man, Mukesh Ambani, and Amazon’s Jeff Bezos clash, for dominance in the world’s fastest-growing e-commerce market. Embassy’s joint venture with Warburg, Embassy Industrial Parks, plans to spend $500 million over three years to develop such properties.

“E-commerce is going to be massive in India, we are seeing a huge digital shift happening throughout the country,” Aditya Virwani, chief operating officer at Embassy Group, said in an interview. “We believe that absorption is only going to go up. It’s still a very initial stage of the market.”

The country’s second-richest developer is counting on billion-dollar investments by companies, including Amazon and Walmart, which owns home-grown shopping website Flipkart, as they seek a greater pie of the largely untapped market.

With Ambani’s Reliance Industries planning to roll out its online shopping platform within 12-18 months, the competition is expected to intensify. Retailers will need large warehousing spaces across key growth centers to ensure fast, last-mile delivery of goods.

A slowdown in the residential market is prompting developers to tap the logistics sector. Private equity funds have pumped $1.1 billion in warehousing assets in the past two years, while developers, including Hiranandani Group and Panchshil Realty, have plans to foray in industrial parks.

The Bengaluru-based Embassy, which specialises in building IT parks and offices in its home market, now plans to grow its warehouse portfolio to 32 million square feet over the next three-four years from 10 million square feet (929,030 square meters).

The expansion would include existing and new developments across top Indian cities, including Pune, Gurugram, Chennai, Bengaluru, Hyderabad, Mumbai, Delhi and Kolkata.

It’s monthly rental income from these assets is expected to grow tenfold from as much as ~6 crore and yields would jump to 15-18 per cent from 12 per cent, Virwani said.

Eyes on tier-II cities

“E-commerce companies want to make inroads into tier-II and tier-III cities and want to be close to their delivery location,” said Prashant Thakur, research head at Anarock Property Consultants. “Robust supply of warehousing is coming in to cater to these companies.”

The realtor, which launched Asia’s top performing real estate investment trust earlier this year with Blackstone Group, is now looking to build REIT-worthy logistics assets.

“We have already seen REIT playing out from our commercial portfolio, we believe that REIT for industrial parks will be on similar lines,” Virwani said.

“We definitely want a fairly big chunk of portfolio, I think anything over 30 million square feet would incentivize us to do REIT.”

Embassy Industrial is also in talks with a big e-commerce company for joint land investment in Chennai to develop a logistics park, Virwani said without disclosing the name as the talks were still not finalised. The company hopes to close the deal in two-three months.

The Embassy Group holds close to 4,000 acres of land across India, of which 1,100 acres could be utilised for development of industrial parks in future.

The group would however continue to purchase new land that is ready-to-use and may also tie-up with private equity partners for larger transactions and to access cheaper capital.