Warehousing yields fall by 200-300 bps in last 2 years

By Raghvendra Kamath,

Yield to costs in warehousing spaces has compressed by 200 to 300 basis points in the last two years as input costs of steel and cement went up sharply and rents have remained subdued for such properties. Yield to cost helps an investor to assess the risk taken to buy an asset .It is arrived by dividing net operating income by total cost of a project. In office spaces, yield to cost have remained 12 to 13 % but in warehousing, yield to cost is compressed to 9 to 10 % now from 12 to 13% two years ago, experts said.

Sanjay Bajaj, managing director, logistics and industrial, India, managing director, Pune, JLL, said the yield to costs for developers have reduced or compressed and is currently 9 – 10 % due to increase in steel, cement and fuel cost which has increased by almost 20 %over last 12 months, he said. Bajaj said given the increase in land and construction costs, the warehousing and industrial prices are likely to increase in the near term. Rents have been quite subdued for a sustained period of time with a compounded annual growth rate (CAGR) growth of about 3% in the last six years (2016-21) and are likely to rise sooner than later, he said.

“Whilst development yields might have compressed over the past few years, the sector continues to witness maximum interest from PE funds, corporate developers, high networth individuals who are very bullish on the India growth story and believe long-term rental growth should negate the currently subdued yields for developers,” Bajaj said.

N Shridhar Narayan – chief executive , Greenbase Industrial & Logistics Park, a joint venture between Blackstone and Hiranandani group, said that economic complexities in the wake of soaring crude oil , commodity prices and inflationary pressures have led to plummeting IRRs (internal rate of returns) in the warehousing sector in the near term. This along with lack of quality land assets, increased liquidity in the market, low debt costs and increasing interests from institutional buyers has led to increase in acquisition costs and lowering yields in the sector in the last couple of years.

“The customers are experimenting with hub and spoke, just in time models to bring down warehousing cost and thereby impacting warehousing rentals. This translates into an average range of 100-200bps of lowered IRR to warehousing developers,” he said.

Shridhar said the situation will continue to impact until the hike in input costs is passed on to the warehousing customers. “Compression in yield will stabilize going forward as market dynamics turn more conducive for industry players. This will result in increase in IRRs in coming quarters,” he said.

Devi Shankar, president – industrial logistics & data centres, Anarock Capital said: “There is more liquidity chasing quality assets and the industry is in the phase of consolidation currently, with some large buy outs and investments witnessed.”
In 2021, Blackstone acquired the entire portfolio of Embassy Industrial Parks of the size of about. 22 million sq ft. Globally, ESR acquired ARA Asset Management which encompasses ARA subsidiary LOGOS.