Investing in a COVID World - The Pros of Commercial Real Estate

Even if the pandemic was detected as early as December 2019, due to various reasons, governments and healthcare agencies failed to understand the long-standing ramifications of this outbreak. Let alone business, even personal finance and investing were hit quite a bit. The top changes that wereimmediately noticeable were big – shops closing, restaurants moving out of business, hotels suffering huge losses, businesses undergoing hiccups. What do you see common in all of these?

The answer is – commercial real estate. It is not strange at all. All of these are businesses. Even if you consider e-commerce, they still require storage spaces for all items they offer on their portal. In the face of the spreading pandemic as of July-August 2020, and the confusion still surrounding the uncertain nature of the propagation, paranoid safety might be the best option available. That strikes out the office-going population, public places for gathering like restaurants and hotels. But the higher dependence on e-commerce meant better usage of warehousing. As per a report by Nibodh Shetty of Knight Frank India, there are four main points that are going to affect the growth of warehousing in the COVID-19 world –

1. Consolidation to Dissipation – Basically, instead of being focused on a large hub-and-spoke model, occupiers are rethinking their strategy. Most occupiers and supply chain managers are considering owning multiple warehouses at different locations instead of a single large regional warehouse. Being distributed thus, business can still operate as normal even if any other area is under lockdown. This will lead to a rise in demand for warehouses
2. Stocking Up aces over Being on Time – JIT or just-in-time system was being followed by manufacturers increasingly. However, lockdowns and disruptions in supply chain management is making companies stick to larger inventories. Many pharmaceutical companies had their processes disrupted due to non-availability of Active Pharmaceutical Ingredients (APIs). Larger inventories mean higher demand for warehouses
3. Wider Reach of E-commerce – The news of JioMart partnering with WhatsApp for delivery of groceries is well-known by now. Focus is gradually shifting to making the best use of all available means to keep business running and prospering. Be it a small farmer or a large manufacturer, businesses are thinking on the lines of better accessibility furthered by internet connectivity and accessibility. This in turn shows better prospects of growth for the warehousing industry
4. The China Factor – The mass disinterest directed at China due to the pandemic scenario and its aggressive economic policy has exposed glaring gaps in the local manufacturing and industrial sector and companies are moving fast to address them. Companies in China are moving out and even if a sixth of them decide to come to India, the increase of warehousing demand will be immense

If we look at just the strong demand drivers in the warehousing sector, India faces a fundamental lack of Grade A warehousing. There is only 88 million[PR1] sft of Modern (Grade A) warehousing stock as of May 2020. This in stark comparison to China, which in the last 15 years has grown to 750 million sft of Grade A warehousing stock. This growth started when China crossed the $2000 per capita income mark (where India is currently at). As per a research report by Welspun One, Grade A supply was expected to grow at (pre-COVID) a y-o-y rate of ~25%. After the impact of COVID-19, they expect y-o-y growth rate to increase by ~10% to meet additional unmet demands.

Keeping these growth factors in mind and the fact that government policies on the central and state level are already quite mature w.r.t. warehousing sector compared to other real estate asset classes, the advantage of having 100% FDI in warehousing and logistics will also attract more players from the global level. Commercial real estate has never looked this lucrative from an investment perspective.

Coming to the Strata’s point of view, focus is always kept on the best assets available, with long term tenancy by companies with a profitable and reputable business history. Be it warehousing, office spaces or any other category of commercial real estate, Strata is committed to providing the best possible investment opportunity to its clients. If you are interested in knowing more about how fractional ownership works in investment terms, please visit us at www.strataprop.com.

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