Private Investments in Industrial Real Estate — Faster Route to Make in India

Traditionally, Industrial Development Corporations in States like MIDC (Maharashtra), GIDC (Gujarat), RIICO (Rajasthan), SIDCUL (Uttarakhand), KIADB (Karnataka), SIPCOT (Tamil Nadu), APIIC (Andhra Pradesh), etc., are entrusted upon the task of land acquisition, planning, development and maintenance of industrial parks in India.

Despite the presence of government entities, private sector developed successful large-sized parks in India — such as Sricity (Andhra Pradesh), Mahindra World City (Tamil Nadu), Brandix (Andhra Pradesh).

Over a period, land acquisition laws in India have become quite stringent which has made the process of setting up new industrial parks quite complex and time-consuming. Complexity of land acquisition process has also resulted in a shortage of industrial land in key industrial clusters such as Chakan-Talegaon-Ranjangaon (Maharashtra), Sriperumbudur-Vallam Vadakal-Oragadam (Tamil Nadu), and Bidadi-Tumkur-Narsapura-Vemagal (Karnataka).

Most foreign investors prefer proximity to existing industrial clusters to leverage on the ecosystem advantages like access to vendors, customers, skilled labour, and stabilized utility grids. In addition, most clusters in India are closer to Tier I or Tier 2 cities offering decent living environment for expats.

Favourable Macro Factors Likely to Result in Increased Greenfield FDI

Between April 2000 to March 2019, India attracted FDI worth US$609.8 billion. The average FDI flows in the first term of Modi government was US$57.3 billion per year. India is expected to register even stronger FDI flows over the next 3-5 years owing to re-election of stable and pro-reform government in the centre, worsening US-China trade war and dwindling resources in competing South East Asian economies like Vietnam.

However, it is important for India to improve its preparedness to land these new factories by establishing industrial parks in right locations and with required infrastructure.

Many of the new foreign investors would be the first-time overseas investors (particularly from China) with little or no experience of working on foreign land. Before locking capital in industrial project in India, they often conduct detailed and time-consuming market research (which can take upto 12-15 months in some cases). In addition, formalities required to lease land and construct factories can take another 15-24 months (in best case scenario). Which means on an average, it would take atleast 2-2.5 years for a factory to come into existence, initiate commercial production and start creating jobs.

There is a need to reduce this long cycle time but offering new industrial solutions. For instance, Ready built sheds help a manufacturer skip 5-6 unit-level permissions — Building plan approvals, applications for electricity connections, applications for water connection, consent to establish, tree cutting permissions, etc. It also helps in saving minimum 15-24 months required for construction activity.

Making Market Entry — Low on Capex, moderately high on Opex

The nature of FDI flow in India is likely to see major diversification. So far, majority of manufacturing FDI in India has come in sectors such as construction development, automobiles and components, chemicals, pharmaceuticals and power sector. Going forward, smartphone manufacturing, electric vehicle components, consumer appliances, telecom equipment, plastic products are likely to emerge as attractive avenues for foreign capital.

Companies in such new age industries have lower risk appetite and shorter duration to respond to market demands. Ready-to-use buildings on rental is a perfect solution for tier 2 and tier 3 suppliers.

Across all major economies such as China, Taiwan, South Korea, Vietnam, significant demand upsurge has been observed in Ready-Built factory buildings and Built-to-suit solutions. Some of the reasons for this shift are:

     i.         With rising geopolitical uncertainty and fast changing customer demands, tier 2 and tier 3 suppliers in several industries do not want to commit capital to buy/lease land and construct factories.

    ii.         Rental arrangement is relatively risk-free choices for companies with no prior B2B or B2C trading or manufacturing experience in a new geography.

  iii.         Such choices allow companies to focus on what they do best rather than investing time and energy in understanding land and construction related matters.

New Industry Champions — Logistics-cum-Industrial Players

Introduction of unified tax structure in the form of GST, replacing a plethora of state and federal levies which has helped to unify multiple states into a single market, bringing a structural shift to the small fragmented warehouse networks into consolidated space along with large distribution chains and centralised hubs.

Consequently, several private Indian developers have been considering investments into the investable grade real estate. These include Musaddilal, Panchshil, GWC, FWS, Hiranandani, Lodha Group, Jalan Group, Srijan, Apeejay, AllCargo among others.

Established and newer foreign funds-managed developers are considering different entry strategy. These include joint ventures, joint developments and acquisition of existing portfolio. Some of these names include Altico Capital, Ascendas FirstSpace, ESR, Hindustan Infralog (DP World + NIIF), IndoSpace, Embassy, LOGOS India, Morgan Stanley and Proprium.

India is likely to attract $12-15 bn in industrial warehousing and light manufacturing industrial parks over the next 4-5 years, addressing the need for Grade A Ready-to-Use facilities. 

What can the Government do to support this industry?

Support in getting land parcels: States should keep provision for allocation of land parcels between (50-100 acres) per park in an industry cluster. In some major clusters there could be as many as 5-6 such parks.

Several states in India have no experience or policies for allocating land to industrial real estate developers. Often these State IDCs see private park developers as competitors. However, states should consider the innovation and efficiency quotient of such developers.

Alternatively, states agencies can facilitate private developers in change of land use or development of access roads and utilities infrastructure to make the propositions to privately developed parks attractive.

A brilliant example can be found in Maharashtra through 15-B scheme, where developers can acquire land and transfer it to MIDC, which develops the land and offers it on lease to developers.

GIDC, Gujarat offered ~70 acres land to M/S Technotrends Autopark at the Japanese Industrial Park (JIT) at Mandal, ~90 kms from Ahmedabad. The company has developed ready built spaces to suppliers to OEMs such as Suzuki Motors and Honda Motorcycles & Scooters.

Favourable policy environment: States need to change industry policies to accommodate new industrial real estate development models. E.g. Let’s analyse the applicability of stamp duty benefits in Model I, the land lease transaction between State IDC to private developer is considered as first transaction and in several states is eligible for 100% stamp duty exemption. Private developer to industrial unit holder is considered as second transaction is eligible for 50% or no stamp duty benefits. States governments can help in making the rental models attractive by offering some criteria-based incentives to investors in all three models mentioned below:

        i.           Model I: Land Lease Transaction (30/60/99 years): State IDC → Private Developer → Industrial unit holder

      ii.           Model II: Built to Suite Model: State IDC → Private Developer → Local Investor → Industrial unit holder

    iii.           Model III: Ready Built Sheds/Warehouses: State IDC → Private Developer → Industrial unit holder (Lease of building and access to common infrastructure)

Gujarat government launched a specific scheme for assistance to private industrial park developers in 2015. It offers several fiscal and non-fiscal benefits to such developers.

Every state should have a private industrial cum warehousing park development policy, encouraging innovations like ready-built, plug-n-play and built to suite models.

Redevelopment and Re-allotment in established industrial areas: There is also a need to look at effective utilization of already allotted industrial plots. In several industrial parks, either there are unutilized plots or unutilized factory buildings. State IDCs need to effectively monitor the actual occupancy and utilization rates of the land assets; and must encourage rental/sale transactions between the original lessor and new users.

Many such transactions are reported in Noida-Greater Noida cluster especially by new ancillary units for smartphone OEMs. In some states, IDCs impose heavy penalties for surrendering land, and high fees for transfer/sub-letting/change of constitution. There is a need to optimize such charges to encourage better utilization of land assets.

A series of policy interventions can help India report faster closure of investment request from foreign entities. The signs are already encouraging with States like Gujarat and Andhra Pradesh having developed the private park development policies. Whereas, states like Karnataka and Tamil Nadu doing the rounds of industry consultations to understand the requirements of the developers.