Investments in the Industrial Infrastructure and Logistics Sector

Investments in the Industrial Infrastructure and Logistics Sector India’s position in the Asia Pacific Region

Introduction

What is ‘Logistics’?

Broad logistical processes

Oxford English dictionary explains logistics as ‘the branch of military science relating to procuring, maintaining and transporting material, personnel and/or facilities.’ However, the meaning of logistics has evolved over time.

Not just military science, but industrial activities all over the world heavily depend on logistical services for their day to day functions.

Organizational skills and management services are crucial to every industry in order to avoid chaos and to ensure smooth flow of raw materials and finished products which ultimately results in successful business and satisfied customers.

Logistical processes can be categorised into two broad heads:

In bound logistics: Concentrating on the storage and in movement of raw materials or parts to manufacturers or assemblers and warehouses.

Out bound logistics: Concentrating on the storage and out movement of finished products at the end of the production or assembly line to reach the end user.

Importance in terms of investments When material storage is involved, and time is a variable, the other variable in the picture is space. Storage is a function which requires space, sometimes specialised ones (like cold storage for perishable goods). This is where real estate comes into the picture. When logistical functions were in their nascent stages, residential and retail spaces dominated the investments in the real estate sector. However, owing to the rapid increase in popularity of logistical services, industrial properties, and especially logistics, is slowly, but surely, gaining popularity.

Components of logistics Logistics can very broadly be de constructed into: Transportation In and out movement of raw material and goods. This is probably the most important or core component of logistics along with warehousing. Mainly consists of infrastructural networks of railways, roadways, airways and waterways. Involves cross border movement and the complications tied to taxation and clearances.

Warehousing

Freight forwarding

Warehouses serve the purpose of storage and distribution points.

These spaces are steadily becoming the most sought after properties in terms of investments as logistics and industrial sector are constantly driving the economy of the nations apart from the tertiary sector.

Nowadays, warehouses are far from go downs and are built to suit and high end in nature with adept professionals handling inventories and operations.

Organizing shipments for individuals or corporations to get goods from the manufacturer or producer to a market, customer or final point of distribution. Freight forwarding is the function of logistics which is complementary to the transportation function. It is the function between warehousing and the last step of good reaching the customer.

Value added logistics This refers to all the complementary functions needed during warehousing such as sorting, labelling, packaging, inspecting and the likes. Value added logistics requires training.

Managerial responsibilities in the logistics sector are also value addition and ensure smooth movement of goods.

Context of Asia Pacific

Rise of logistics in Asia Pacific region The logistics sector in Asia Pacific is in its initial stages. Until recently, the sector in this region lacked investible assets. Moreover, there were issues of inexperience in the said field in terms of expertise and managerial skills, and lack of transparency. However, as was common in most cases, a missing sector meant enormous potential.

Today, this region is brimming with opportunities for international trade and large scale investments. Most of the countries in the region are in their developing stages instead of already being developed. This scenario provides ample chances to intervene as a foreign or as a domestic investor.

In the last couple of years, Asia Pacific region has emerged as one of the most sought after property destinations for investors willing to make profits. Another trend noticed is that the office and residential sectors have tightened paving way for industrial sector investments, especially post technological advancements and western influence.

What is also inviting is the onset of online retail which has played a major role in the demand creation for logistics and warehousing. Shippers include industrial manufacturers and sellers who outsource logistical functions to third party called 3PLs or third party logistics-the most popular logistical option in Asia Pacific countries.

Countries of Asia Pacific:

• • • • • • • • • • •

Australia Bangladesh Bhutan Brunei Cambodia China Hong Kong India Indonesia Japan North Korea

• • • • • • • • • • •

South Korea Laos Macau Maldives Malaysia Mongolia Myanmar Nepal New Zealand Pakistan Papua New Guinea

• • • • • • •

Philippines Singapore Sri Lanka Taiwan Thailand Timor-Leste Vietnam

Logistics sector in Asia Pacific region Currently, logistics sector in the Asia Pacific region is at an all time high in terms of investments. Governments across the countries are investing heavily in terms of infrastructure which compliment the logistics sector. Until recently, however, the Asia Pacific market was not as mature compared to Western markets. But some key trends brought about the much needed change. These were: •

Growing number of affluent middle class

•

Online retail and commerce

Total Commercial Real Estate Transactions in Asia Pacific (2012) 12%

• And the above two phenome leading to changing consumer habits Today, investors like developers, national pensions, private funds and REITs are competing with one another in order to purchase quality logistics assets in the Asia Pacific region.

Industrial (including logistics) Retail, residential, office and others

What is ‘REIT’?

Real Estate Investment Trust or REIT are companies that own or finance income producing real estates. They provide regular income streams and pay out taxable income in the form of dividends to shareholders. The shareholders in turn pay their income tax on these dividends. REITs allow investors to earn from real estate without actually buying the property. They simply purchase stock.

According to an ANREV investor survey taken in 2012, the overall interest in Asia Pacific industrial sector has surpassed both office and residential sector.

15

•

By 2013, there were

REITs listed in the region mainly in countries like Singapore,

•

Average price for logistics transaction in Asia Pacific region jumped from USD 110 per sq.

Japan, and Australia. By May 2013, the totalled assets of REIT was USD 26 billion.

ft. in 2009 to USD 161 per sq. ft. in 2013. There was therefore a four years.

46% increase in just

Asia Pacific Overview

South Korea

China

South Korea lags behind all the countries mentioned in this summary since neither REIT nor listed developers focus on logistics sector.

Due to strict zoning regulations, large land sizes are difficult to develop for facilities.

Mapletree is a global logistic developer in this country, however, local companies dominate the South Korean market.

China, as a country, has entirely recognised the power of a strong logistics network and gone on to strengthen it which has lead to its economic growth and rapid modernisation. Logistics is an excellent sector in China as it is a manufacturing and trading hub, there is increase in the retail sector and the emergence of e-commerce.

Between 2005 and 2012, the logistics market in China grew at a rate of 16%.

Japan

Hong Kong Hong is the strongest if we talk about the transportation component of logistics. It is the second busiest international air cargo centre in the world and the third busiest container port per World Trade Organization (WTO). Hong Kong also serves as an important gateway to mainland China.

Singapore Major logistic hub of the Asia Pacific, Singapore is one of world’s busiest seaports in terms of container through put and trans shipment. This is because it handles half of world’s annual crude oil supply. It is also an internationally recognised aviation hub. Singapore is strategically located on the world map and is extensively connected to the world via land and sea. This makes it an extremely attractive market with a healthy demand for logistics properties. First industrial REIT emerged in 2002 in Singapore.

Japan leads in Asia Pacific with the largest volume of logistics transaction amenities and infrastructure.

However, this does not mean this industry does not hold potential. Traditional owner occupancy amount to 90% of total industrial stock in Japan. High quality and modern leased assets are the other 2%.

Australia Prior to 2000, majority of the industrial developments in Australia were undertaken by owner occupiers. However, since then, there have been higher returns and stable growth in rental property which in turn has increased investor attraction which includes Australian REITs and foreign investors as well.

Where does India stand?

Evolution of logistics in India Traditionally, India is an agrarian country. The primary sector

contributes to 16% of GDP as of 2015. But earlier, the share of agriculture was much larger and India was not urbanized as much as it is today, and FCI (Food Corporation of India) was the only organization which was responsible for storage and warehousing of food crops. ‘Go downs’ were the only logistics that India knew then. But inefficient storage mechanisms meant excessive wastage.

L PG

But then, post 1991, India was swept by the winds of Liberalization, Privatization and Globalization or LPG. This paved way for rapid economic development in India and Foreign Direct Investments (FDIs) began to pour. In. International companies began to invest in India because of cheap labour wage rates and changing economic scenario. In turn India reaped the benefits of the financial aid, technological know how and the western ways of operations and management. This was when a few changes began to take place in India. Cut to 2015, Financial Times mentions that India overtook China as the top destination of FDIs in Asia Pacific and in the first half of 2015, India

attracted investment of $31 billion compared to $28 billion of China.

All these things have lead to: • Increasing use of technology and internet leading to e-commerce boom • Changing demands of a bloating middle income group • Increasing investments in infrastructural development (In the 12th Five Year Plan spanning 2012 to 2017, the Government of India (GoI) had set aside USD 1 trillion on infrastructure) All of this has lead to the manifold increase in the demand for specialized logistics.

India today 31% urbanized and the nominal GDP by 2014 stood at USD 2050 billion. All of this clearly indicates where India is headed to in the years to come. Talking about logistics, India spends 13% of its GDP on the sector and this can be a Per Census of India 2011, India was

good thing as well as a bad thing. Good because it means that the sector is emerging as a powerful one with weighing importance but bad as the expenses can be reduced by focussing on efficiency. optimization and simpler tax structures to reduce costs. What also fuels the fire of logistics sector’s growth is the Make in India campaign encouraging home grown products and local manufacturing as well as the proposed GST (Goods and Services Tax). Currently the logistics industry stands at USD

400 billion.

Successes •

•

• • •

Currently, 100% FDIs are allowed in construction sector of cities and townships as well as transport and warehousing services Per World Bank report, India’s logistics performance index, based on defined parameters by the organization, has shot up from 54th position in 2012

to 35th position in 2016.

Indian market has already witnessed big players in the sector such as DHL, FedEx, UPS Supply Chain etc.

India’s logistics sector is diversifying with global and domestic investors showing interest in cold chain logistics, agricultural logistics and warehousing.

The National Bank for Agriculture and Rural Development (NABARD), post the announcement of

allocation of INR 5000 crores in the 2014-15 budget, vowed to support creation of infrastructure for storage of agricultural commodities. Reserve Bank of India (RBI) issued guidelines for the creation of Warehouse Infrastructure Fund (WIF). This fund aimed at providing loans to public and private sectors for construction of warehouses, cold storages and other cold chain infrastructure.

•

In 2015, GoI allotted USD 11 billion from the public funds to the development of infrastructure alone.

• Total domestic freight traffic increased at 7.1% over 2006 to 2014.

• This growth is to reach 11.4 million tonnes by 2032 • FDI inflows in air transport and freight between April 2000 and January 2015 came to USD 563 million • In the next five years, the probable growth rate of aircraft movement is going to shoot up by 4.2%; passengers across Indian airports to go up by 5.3% and freight will jump to 5%.

• So far, GoI has developed ten coastal economic regions • Under ‘Sagarmala’ project, INR 70,000 crores have been invested on port improvements and tax incentives are underway • Cargo capacity in India is expected to increase to 2500 MMT (Million Metric Tonnes) by 2017 from 1250 MMT in 2012

• Investments by GoI in the year 2016-17 on railway was INR 1.21 lakh crores • Several freight corridors like the Delhi Mumbai Industrial Corridor (DMIC), North South Delhi Chennai, East West Kharagpur Mumbai are emerging as strong logistics infrastructure • The rail freight grew by 1.1% in March 2015 and the total revenue from commodities increased by 12.7% between 2014 and 2015

• NHAI’s net road project in 2016 was 4368 km • India has the second largest road network after United States • The value of roads and bridges infrastructure in India is expected to grow at a rate of 17.4% between 2012 and 2017.

• The value of these infrastructure is to touch USD 19.2 billion by 2017.

India compared to Asia Pacific leaders •

The logistics cost as a percentage of manufacturing cost is lower in China as compared to India. Japan spends

10% of its GDP on logistics. In most developed countries across the world, this percentage comes to 6% to 7%.

•

In terms of inflow of FDI, the factor ‘ease in doing business’ matters to a great extent. India ranks

•

Per a Price Waterhouse Cooper report, the penetration of internet in India stands at

•

this department as compared to China which stands at 89thposition.

Article from TOI dated 19th Sept, 2016, Mumbai: Blackstone readies India REIT listing

133rd in

19% compared

to

China where it is 46% i.e. more than double that it is here.

The following Logistics Performance Report (LPR) drawn by World Bank in the year 2016 indicates where some of the leading Asia-Pacific countries stand as compared to World leaders, and also where India stands: Country

LPI Ranking

Customs

Infrastructure

International Shipments

Logistics Competence

Tracking and Tracing

Timeliness

Germany

1

2

1

8

1

3

2

Singapore

5

1

6

5

5

10

6

Hong Kong

9

7

10

2

11

14

9

United States

10

16

8

19

8

5

11

Japan

12

11

11

13

12

13

15

India

35

38

36

39

32

33

42

India (2014)

54

65

58

44

52

57

51

Indicates Asia Pacific country

The newspaper article, in its excerpt, mentions Blackstone Group finalising to raise USD 600 million through REIT and that this might be India’s first REIT listing. This means that India is late by about 14 years as compared to Singapore.

Why is India lagging behind?

•

•

•

Even though the logistics sector in India is steadily improving, things are far from perfect. This sector faces its share of challenges in the country. The primary problem is that the modal mix is extremely skewed as is clear from the pie chart on the right (airways are just 0.1% and inland waterways 0.2%).

Add to this the woe of quality of roads in India. Even though the network is impressive in terms of numbers, the roads are not physically of the best quality. The other problem is heavy congestion. For e.g., National Highway in India consists of just 2% of Indian roads, but carries 40% of the total traffic.

FDIs need ministry level clearances and environmental go ahead, all of these are cumbersome tasks.

Additionally, industries often need to take responsibility of relocating people and their disturbed livelihoods as a consequence of the projects. Business houses look to avoid political and activist attention.

Total freight transport modal mix 8%

60%

32%

Airways

Coastal shipping

Inland waterways

Railways

•

Projects are also stalled, sometimes, due to time and cost overruns in India as the procedures of land acquisition, materials costs and complex taxations create hindrances.

•

Customs clearances are complex in nature and goods travelling across state borders face repeated tax payment shooting up the logistics costs manifold.

•

Lack of efficient implementation of IT enabled tracking and tracing which hinders smooth functioning. Also, technological advancements and skills have not arrived in full thrust in India to this date. Cold storage and temperature controlled warehouses (for e.g. for medicines) need expert handlers.

There are logistics services in the world where all kinds of expertise such as packaging, labelling, separation, sorting, inspection, distribution etc. take place under one roof by trained and skilled labour. Often, these warehouses do not charge for the space but simply charge for the services provided, thereby easing out the logistics services for various industries by leaps and bounds.

•

Logistics services in India can also be classified as a luxury as it is neither accessible nor affordable by all. Farmers in India, who are often poor, are not able to store their produce which compels them to sell at a price lower than not just the market price but even their production costs. India has constantly faced the problem of farmers suiciding because of this reason – one amongst many others.

Roadways

Future of logistics in India •

The drawbacks, however, only means that there is a window for improvements. Logistics, with an improved reputation, is rising as one of the core investment options in India. Apart from the risks of timing, local market dynamics, lease structures which are variables which can waver in any country, it is estimated that logistics sector will reach a valuation of USD

1 trillion in the next five years.

•

There is a healthy demand of industrial and logistics properties in the real estate market and the supply is limited. This creates a favourable market scenario for the investors. Rent is growing steadily for such properties.

•

The expected implementation of GST in India will boost the logistics sector by trimming down costs. The planned model which consists of Central GST and State GST proposes to replace close to 29 state and federal taxes and tariffs and a single tax will be levied at the point of sale. The current combined Centre-State statutory rate stands at 26.5% (CenVAT of 14% and VAT of 12.5%). Post GST implementation the same is expected to reduce to the standard rate of 18

to 21% which will be levied on goods and services.

•

GoI has also come up with a special category of Special Economic Zone (SEZ) called Free Trade and Warehousing Zone (FTWZ). It is designated as a foreign territory and is expected to be an integrated zone used as International Trading Hubs. A few examples of FTWZ include Kandla Trade Free Zone, DLF Universal, Shipco Infrastructure etc.

•

The concept of dry ports also aids logistics sector. Dry ports cut down on resources of time and money by providing customs clearance on goods which are manufactured far from the wet ports. Major wet port cities include Mumbai, Chennai and Kolkata. For the rest of the big industrial cities in India, dry ports can prove to be a boon.

•

India can also come up with concepts of airport storing facility as is seen in Dubai and seaport storing facility which is common across leading alpha cities of the world which are situated on sea and waterways.

•

To sum up, demand of logistics is aplenty in India and as the population is booming, food grain production is improving, infrastructure development is in prime focus, manufacturing and service sector are generating the largest chunk of the economy, the requirement of logistics is only on the rise.

This definitely makes India attractive as an investment destination.

References •

freestockphotos.name

•

oxforddictionaries.com

•

en.wikipedia.org/wiki/Logistics

•

en.wikipedia.org/wiki/Asia-Pacific

•

electroluxgroup.com

•

www.anrev.org

•

www.reit.com

•

clipartfest.com

•

www.careratings.com

•

www.nabard.org

•

www.indianchamber.org

•

www.jll.co.in

•

www.rvsimsr.ac.in

•

www.ibef.org