Betting on GST, Embassy enters warehousing

Article first appeared on Live Mint on 25 Aug 2015 – Written by Madhurima Nandy

Investments into warehousing business is slowly gaining momentum in India as businesses expect a revolution in the logistics arena once the destination-based tax system Goods and Services Tax (GST) comes into play. Real estate developer Embassy Group recently created a new business vertical to set up warehouses and industrial parks.

Called Embassy Industrial Parks Pvt. Ltd, the Bengaluru-based firm, which has a property development portfolio funded by Blackstone Group, has appointed Anshul Singhal as chief executive. The new business will build and lease spaces close to cities and aims to cater to sectors such as packaged consumer goods, retail, e-commerce, auto ancillary and apparel, Singhal said in an interview.

The business will model itself on the lease-rental model that the group has adopted for its information technology park projects.

Embassy Industrial Parks has also partnered with Canada-based real estate investor Brookfield Asset Management, Inc. to develop a 200 acre plot of land in Sriperumbudur, near Chennai. In an asset-specific deal, Embassy has bought stake in the land that belonged to Brookfield.

It will develop build-to-suit industrial and warehousing buildings and also sell industrial plots. The total project cost will be about Rs.550 crore and will take close to five years to develop.

“Embassy Industrial Parks is looking to build and lease close to 10 million sq. ft over the next five years. The first phase of the will be to ensure that we take good land positions in key markets—close to cities such as Mumbai, Delhi, Bengaluru, Chennai and Pune—that are a mix of consumption centres and have active industrial presence,” said Singhal.

Brookfield declined to comment on the transaction.

“This is a profit-sharing joint venture between Brookfield and Embassy, where the plan is to build high-grade warehousing facility. The project is in the masterplanning and design stage,” said a person familiar with the development who declined to be named.

Separately, Embassy Industrial Parks is also planning to raise about $200 million from global private equity fund Warburg Pincus. The money will be raised in two tranches, $100 million in each; Embassy Group will also pump in about $60 million in two equal instalments. The transaction, which would be a so-called blindpool investment platform between the two partners, where they go out and scout for land and develop projects, is at an advanced stage.

Warburg Pincus didn’t respond to an email query.

This is Embassy Group’s second attempt to set up a warehousing business. In the Global Investors’ Summit in Bengaluru in 2012, the realty firm and Maini Group, makers of electric car Reva, had announced the formation of a warehousing and logistics joint venture company. But the plan was shelved later. In the new avatar, Maini Group has a 10% equity stake in Embassy Industrial Parks, said Jitu Virwani, chairman and managing director, Embassy Group.

Embassy aims to make three kinds of offerings from the new business: build industrial parks on 50-200 acre land parcels near key cities; set up build-to-suit facilities or campus for international firms; and help companies’ expansion plans by building in return for a long-term, lease arrangement.

“The business of warehousing is set for high growth and we will see entry of more organised players in this highly fragmented space. Warehousing in India is likely to get a big boost from proposed GST implementation and explosive growth in e-commerce segment,” said Manish Sharma, partner and logistics leader at PwC India, a consultancy firm. Once GST becomes a reality, it will lead to creation of large warehousing hubs, encouraging the organised sector to take part in this business segment more aggressively, Sharma said.

The national-level tax structure is expected to facilitate efficient cross-state transportation and bring down logistics costs. India’s warehousing requirement is expected to grow at an annual average rate of 9% to 1,439 million sq. ft in 2019 from 919 million sq. ft in 2014, property consultancy Knight Frank said in a 2014 report.

The growing e-commerce sector, too, will need warehousing infrastructure near consumption centres. Currently, most e-commerce firms have in-house logistics firms, but with increasing scale and complexity, third-party service providers could become more active, Sharma said.

Though the Constitution amendment bill to implement GST was tabled in the monsoon session of Parliament after a select committee gave its report, it could not get through due to opposition stalling legislations.

The government is now planning to call a special session of Parliament next month to get the bill passed. However, with the Congress continuing to oppose the bill, its passage looks difficult. It will also derail the government’s implementation deadline of 1 April.

Remya Nair in New Delhi contributed to this story.