Warehousing & Industrial Real Estate Solutions in India. Existing building, built-to-suit space or self-build property

Transcription

1 Warehousing & Industrial Real Estate Solutions in India Existing building, built-to-suit space or self-build property

2 On Point Warehousing and Manufacturing Real Estate Solutions in India Procuring Warehousing and Industrial Real Estate Space in India There are numerous risks and challenges involved in providing warehousing and logistics real estate solutions in an emerging market like India. Real estate procurement strategy is a complex multi stage process because it is often difficult to know where to start, what the available options are, what difficulties different areas face in terms of cost control and what best market practices should be implemented. In analysing this process, the Warehousing and Logistics Solutions (W&LS) team of Jones Lang LaSalle Meghraj has prepared this paper with insights from Jones Lang LaSalle Industrial Asia to provide advice on the various warehouse and logistics real estate procurement solutions in India. Introduction Companies set up new facilities or expand their existing warehouse facilities in India because of several factors such as access to lowcost labour, suppliers and components and to take advantage of domestic consumption. Investors and developers, both national and international, are seeking to meet demand from occupiers. However, the quantum and quality of stock being delivered in the market are posing challenges for occupiers in search of existing options that can meet their requirements. Thus, in assessing real estate options, it is imperative to fully understand what is possible and the impact of real estate operating practices on businesses, especially for MNCs operating in India. To provide answers to the key Corporate Real Estate (CRE) concerns of occupiers, this paper covers the following: Do we opt for an existing building? Is there anything available matching our requirements? Will we be able to build it ourselves? What are the risks? What are the local real estate operating practices and what do they mean for us? Real estate options available for the industrial / warehousing occupiers in India include the following: Existing Building - lease or purchase of an existing building, which has been built speculatively; Build to Suit - work with a third-party developer to build a facility according to the specifications of the end-user; Self-Build - acquire land, develop the building and either sell the asset and lease it back or retain ownership.

3 On Point Warehousing and Manufacturing Real Estate Solutions in India Warehousing and Industrial Real Estate Procurement Options This paper explains the various procurement options available for a warehousing and industrial occupier who is planning to set up warehouses in India. The options include moving into readily available warehouse and industrial space, built-to-suit warehouse and industrial space or a space that is built by the occupier. Real Estate Option 1: Existing Building Unlike in more mature markets where there is an existing stock of warehousing space, nascent markets like India have limited stock; therefore, we focus on new speculatively built facilities. In this model, the developer undertakes the responsibility of securing all the required government approvals until the base-building handover. However, as per market practice the internal distribution of utilities and the application for the transfer of user rights are the occupier s responsibility. Considerations for warehousing and industrial occupiers For warehousing and industrial properties, the typical criteria of the building being considered by occupiers include the capacity for floor loading, center heights, eaves height, height of the flooring above ground level, docking facilities, road width for 40-ft containers, canopies, shutter sizes, drainage system and parking space. Many facilities have poor waterproofing at key locations, e.g. window sills, seepage through below-ground rooms etc. It should also be highlighted that there are very few warehouses and industrial spaces with Grade A specifications in India, and the level of customisation for existing warehouses is difficult. Building specifications are typically for general use, providing moderate vehicle-turning circles, low floor-loading capacity, general clear heights of 5-6 m, limited power supply and power quality, as well as moderate sump facility. Therefore, this restricts some specialised warehouse uses. Subject to timing and negotiation, the developer could offer the base building in an advanced handover condition by providing a range of improvements above and beyond a bare shell. These improvements may include surface finishing, additional building services and enhanced utility connections, with key upgrades commonly comprising additional power supply, insulation and ventilators. Existing Building Option Advantages Disadvantages Speed to market-subject to the extent that the building is completed Customisation could be a problem Risk reduction since there is no need to go through the lengthy and complicated approval process Quality of the base building during the construction might not have been independently monitored and verified Minimal capital expenditure Construction-related delays Limited construction liability since the majority should be incurred by the developer The solution is a compromise between what is available and what is desired Opportunity to control tenant improvements Limited control over the design Flexibility since lease terms are generally short Mismatch in technical specifications

4 4 On Point Warehousing and Manufacturing Real Estate Solutions in India Existing Building: Parameter Assessment Matrix Corporates Capital Expenditure Cost Certainty Schedule Certainty Quality Certainty Low High The obvious advantage of buying or leasing an existing building is that the occupier has an opportunity to see the property beforehand, evaluate its quality & can use it to meet his immediate requirements. Time is the major driver for many occupiers since they often need to enter the Indian market quickly due to business growth or expansion. Meanwhile, the key constraint is the lack of Grade A warehousing stock, which has driven many occupiers to develop and build their own premises. Tips for Best Practices on Existing Buildings: Seek a reputable developer with a strong track record and a pan India or local presence. Clearly document handover condition, materials, suppliers and technical specifications and afterwards structure the contract, incorporating terms to allow protection from latent defects/failure to meet agreed specifications. Ensure that the developers have obtained all relevant approvals/ permits from government authorities. Have an independent expert audit the building s technical and structural handover condition. Real Estate Option 2: Built to Suit In situations where there is insufficient supply of suitable facilities, need for specific provisions and occupier s space requirement is not for immediate use, the built-to-suit option offers a customised facility to the occupier. There are also developers who are willing to build this type of facility, subject to agreed specifications. However, the need to clearly understand and document the delivery assumptions and specifications is much more critical in India as developers lack prior experience or track record in delivering Grade Grade A warehouse and Industrial premise. Precise design criteria, detailed performance requirements, along with appropriate checks and measures, should be incorporated into the contract document prior to the final negotiations. Selecting the Right Development Partners Factors that must be considered when selecting a development partner include: Developer s track record Capital availability for the project Selecting the right development partner - Ensure that the developer is in procession of industrially converted land Local connections and liaison ability for approvals Involvement of the occupier, as a future tenant, in the design-andbuild process Type of facility management to be employed after the occupation Built-to-suit premises can be a compromise between the self-build option and leasing existing premises. The advantage of timeframe offered by the option to lease existing premises and the level of control offered by the self-build option is not available in the builtto-suit option. The main advantage of this option for an occupier entering India, especially for the first time or in a small to medium scale, is the fact that it is possible to obtain a specialised facility without taking too much risk. This is on the assumption that the documentation between the two parties is in such a way that the responsibility to complete the facility within the given budget rests with the developer or construction company. Although the delivery risk is reduced by the relationship between the developer and the tenant, there is still a need to ensure that a stringent quality control is maintained on the site during the entire construction process as quality control continues to be an issue in India s construction sector.

5 On Point Warehousing and Manufacturing Real Estate Solutions in India 5 Advantages Customised and takes account of occupiers specific requirements Opportunity to negotiate specification, construction quality and efficiencies Prescribed time for delivery, with the developer taking on this risk and incurring penalties for delays No upfront construction cost (likely to have some fit-out/ infrastructure cost), which is effectively spread over thelease term Built-to-Suit Option Disadvantages Longer lease commitment Developers with track record in built-to-suit properties are very limited The quality of construction is under question, if not monitored, by a project management firm The technical specification must be clearly defined; if this is not done, there is a possibility that the developer will not adhere to the requirements of a Grade A warehouse facility Built-to-Suit: Parameter Assessment Matrix Corporate Involvement Corporates Capital Expenditure Cost Certainty Schedule Certainty Quality Certainty Low High Best Practices on Built-to-Suit Options: Ensure that the land is classified for industrial usage. Clear the documentation required to ensure that the specifications are fixed and adequate penalty is to be imposed if they are not adhered to. Technical specifications, construction costs, drawing, layouts and timelines for No-Objection-Certificates (NOCs) must be documented and signed. Structure the agreement so that the occupier can be represented at project meetings and monitor progress. Maintain close involvement so that the construction progress is monitored and the final delivery is done according to expectations. Define the project requirement in detail prior to signing a contract to minimise room for incorrect assumptions and variations. Details include the required performance, specification and suitable materials and manufacturers. Independently undertake a concept design to minimise risks. Penalty clauses and rent-free periods should be discussed so that the timelines are adhered to. There should be clauses in the agreement so that the developer obtains all NOCs from the government and local authorities before the occupation. Include indemnities in the contract to protect occupier interest in case there is delay in obtaining the NOCs. The defect liability period should be discussed and agreed upon by both parties. Real Estate Option 3: Self Build Under this scenario, the occupier selects a site, purchases the land and then builds a facility according to the business needs, taking full responsibility for securing all design and construction-related government approvals from the start to finish. The key aspects for this option are to ensure that all the necessary approvals are sought and then find the right construction partner(s) for the project. The self-build option will require considerable amount of corporate involvement in terms of time and capital. This may not be suitable for every occupier; it is appropriate for corporates that have in-house expertise or a partner to whom the process can be outsourced.

6 6 On Point Warehousing and Manufacturing Real Estate Solutions in India Self Build Option Advantages Disadvantages Control over cost, quality and schedule (including the use of Significant capital investment consultants and contractors) The occupier secures a facility that is specially tailored Land procurement risk for its operations Eliminates the risk of a conflict between the developer or landlord Requires a high level of involvement from the occupier and the occupier Suitable for large-scale developments Exposure to financial, construction and schedule risks There is less flexibility since the occupier is also the owner of the asset Cannot leverage developer contacts and liaison ability Self Build: Parameter Assessment Matrix Corporate Involvement Corporates Capital Expenditure Cost Certainty Schedule Certainty Quality Certainty Low High Tips for Best Practices on Self Build Options: Risk Mitigation Strategies of Various Procurement Options Consider longer-term exit strategy in the design and, where possible, make the building adaptable to other uses to maintain maximum flexibility for disposal. Consider how potential expansion requirements can be met in the future. Ensure that the there are no title and documentation-related issues during the land acquisition stage. Understand and plan for the approval process for land & building. Have a detailed list of government approvals and make sure to check who is responsible for payment and for driving progress. Regardless of whether it is a foreign or local construction company, the workforce is largely made up of migrant workers with low skill levels. Therefore, the project s quality is largely driven by effective project management. Determine the risks and put in place the right contract to manage the performance of the contractor and the delivery of the project. Option Existing Building Developer Design and Build Self-Build Strategies to Reduce Risk Clear demarcation of responsibilities Effective monitoring systems Applications for government approvals delegated to the developer Clear penalties for missing key delivery dates Penalties for delay in obtaining government approvals and NOCs Establish clear timelines Clear penalties for missing key delivery dates Improve transparency/information flow Corporate involvement to monitor the quality of the delivery Penalties for delay in obtaining government approvals and NOCs Develop suitable exit strategy Government land allotment could also be considered as an option

7 On Point Warehousing and Manufacturing Real Estate Solutions in India Conclusion The decision-making process around which real estate option to follow is likely to be a compromise between a facility that suits an occupier s time needs and business pressures that arise in the process. Each real estate option discussed in this paper will allow varying levels of time and cost savings, as well as solutions, that vary in their ability to meet occupiers needs. From our experience, facilities that are mission-critical lean towards the built-to-suit/self-build option and are often retained as assets. Nevertheless, occupiers need to assess not only the building but also the constraints on their ability to expand as well. If timing is the critical success factor, then an existing building should be the preferred option. However, additional time and money may be required during the tenant improvement stage. If flexibility for contraction and growth is required, then the solutions may be a purpose-built or an existing building; however, the greatest flexibility is likely to be found on a purpose-built basis. Overall, the good practice of allowing sufficient time and expertise for finding and planning a new facility and ensuring that all aspects of delivery are fully documented must be applied rigorously. With these in place, companies can procure successful solutions to capitalise on real estate opportunities that warehousing facilities in India have to offer. Hariharan Ganesan Senior Analyst, Research and REIS Jones Lang LaSalle Meghraj Hariharan Ganesan joined the Jones Lang LaSalle Meghraj Research team in April 2008 and is responsible for the Indian Real Estate Intelligence Service (REIS) publications. Based in Chennai, he contributes to research deliverables on industrial, commercial, retail and residential real estate markets in the country. Prior to joining the firm, Hariharan worked on research in different fields for two years in India. He holds a dual degree from Bits Pilani and an MBA from IIPM, Delhi. Jerry Kingsley Assistant Vice President, Warehousing and Logistics Solutions Jones Lang LaSalle Meghraj Jerry Kingsley has been a part of Jones Lang LaSalle since 2006 and has been involved in several projects relating to commercial real estate. He has been an integral part of Warehousing and Logistics Solutions (WLS) team, tailoring solutions to help clients unlock the potential of their supply chain real estate. Apart from managing industrial and warehousing related transactions for Chennai region, Jerry also coordinates with other city teams to drive business development and firm wide best practices, important for the warehousing business of the firm.

8 About Jones Lang LaSalle Jones Lang LaSalle (NYSE:JLL) is a professional services firm specializing in real estate. The firm offers integrated services delivered by expert teams worldwide to clients seeking increased value by owning, occupying or investing in real estate. With 2007 global revenue of USD 2.7 billion, Jones Lang LaSalle serves clients in 60 countries from 750 locations worldwide, including 180 corporate offices. The firm is an industry leader in property and corporate facility management services, with a portfolio of approximately 1.2 billion square feet worldwide. LaSalle Investment Management, the company s investment management business, is one of the world s largest and most diverse in real estate with more than USD 53 billion of assets under management. For further information, please visit our website, Jones Lang LaSalle has over 50 years of experience in Asia Pacific, with over 16,500 employees operating in 76 offices in 13 countries across the region. About Jones Lang LaSalle Meghraj Jones Lang LaSalle Meghraj, the Indian operations of Jones Lang LaSalle, is the premiere and largest real estate professional services firm in India. With an extensive geographic footprint across ten cities (Delhi, Mumbai, Bangalore, Pune, Chennai, Hyderabad, Kolkata, Kochi, Chandigarh and Coimbatore) and a staff strength of over 2900, the firm provides investors, developers, local corporates and multinational companies with a comprehensive range of services including research, consultancy, transactions, project and development services, integrated facility management, property management, capital markets, residential, hotels and retail advisory. About Warehousing and Logistics Solutions (WLS) Over 50 years of experience in working with high-profile organizations across the globe to provide specialized services for owners and occupiers of warehousing and industrial related real estate. We have a very extensive presence in India providing warehousing and industrial real estate services across the country and our penetration includes not only Tier 1 & Tier 2 cities but also Tier 3 cities. Key services include Tenant Representation Services: Advice on acquisition of new facilities, expansion of operations, relocation or renegotiation, sublease, sale and lease of buildings. Projects and Development Services for managing green field and brown field projects. Facilities Management for managing the facilities with respect to client specific requirements. End-to-end management of day-to-day operations. Research and Consulting Services : Provide our clients with industry leading research, provide business location advisory, provide updates on market movements and identifying opportunities To know more about our warehousing and logistics solutions, please contact the following: Ramesh Nair Managing Director Warehousing & Logistics Solutions Ramesh.Nair@jllm.co.in Chennai Jerry Kingsley Jerry.Kingsley@jllm.co.in Kolkata Bharat Manot Bharat.Manot@jllm.co.in Nation Capital Region Himanshu Dhingra Himanshu.Dhingra@jllm.co.in Bangalore N Srinivas N.Srinivas@jllm.co.in Hyderabad Sandeep Singh Deo Sandeep.Singh@jllm.co.in Mumbai Sharabjit Sighat Sharabjit.Sighat@jllm.co.in Pune Dhruv Agarwal Dhruv.Agarwal@jllm.co.in Acknowledgments: Jones Lang LaSalle Meghraj India Research Team COPYRIGHT JONES LANG LASALLE MEGHRAJ 2009 All rights reserved. No part of this publication may be published without prior written permission from Jones Lang LaSalle Meghraj. The information in this publication should be regarded solely as a general guide. Whilst care has been taken in its preparation no representation is made or responsibility accepted for the accuracy of the whole or any part. We stress that forecasting is a problematical exercise which at best should be regarded as an indicative assessment of possibilities rather than absolute certainties. The process of making forward projections involves assumptions regarding numerous variables which are acutely sensitive to changing conditions, variations in any one of which may significantly affect the outcome, and we draw your attention to this factor.