ICRA Forecasts Bright Future for Warehousing Stock

ICRA, a prominent credit rating agency, has released a forecast predicting a substantial rise in industrial and warehouse logistics park (IWLP) supply in India, with an anticipated growth rate of 13-14% year-on-year (YoY) for FY2025. This growth is expected to elevate the total warehousing space to approximately 424 million square feet. The agency also expects absorption rates to increase significantly, projecting a rise to 47 million square feet in FY2025, up from 37 million square feet in FY2024, fuelled by strong consumption-driven demand.

Despite this optimistic outlook, vacancy rates across these key markets are expected to stabilise at around 10%, maintaining the same levels as FY2024. A key catalyst for this robust demand is the granting of ‘infrastructure’ status to the logistics and warehousing sector, combined with the rapid expansion of e-commerce, rising consumer demand, and governmental initiatives aimed at transforming India into a manufacturing powerhouse. An ICRA spokesperson stated, “In the last five years, Grade A warehouse stock in primary markets has exhibited a healthy compound annual growth rate (CAGR) of 21%, reaching 183 million square feet in FY2024. This figure is projected to grow by 19-20% YoY in FY2025, with an expected addition of 35 million square feet of Grade A warehousing.” Consequently, the proportion of Grade A stock within the overall warehousing supply is anticipated to increase to 51% by March 2025, compared to 49% at the end of the previous fiscal year.

The backing of global operators and investors such as CPPIB, GLP, Blackstone, and others is pivotal, as they currently support over 50-55% of India’s Grade A warehousing stock. The long-term growth outlook for these high-grade facilities is further bolstered by tenants’ growing preference for modern, efficient, and environmentally sustainable (ESG-compliant) logistics spaces. Demand for warehousing remains strong, particularly from third-party logistics (3PL) providers and manufacturing sectors, which collectively accounted for approximately 65% of the total leased area as of March 2024. E-commerce continues to be a significant player, contributing about 15% of the leased area. Among the eight primary markets, Mumbai and Delhi-NCR account for approximately 42% of the total warehousing stock as of March 2024, with healthy occupancy rates hovering around 90%. However, challenges persist, notably the steep rise in land prices. Competitive rental rates, influenced by both domestic and international players, alongside the emergence of new micro-markets, make land cost a critical factor in determining the profitability of warehousing projects.

Consequently, Tier-II and Tier-III cities are becoming increasingly attractive for new Grade A developments. Looking ahead to FY2025, ICRA anticipates that operators’ credit profiles will remain stable, bolstered by high occupancy levels and expected rental escalations that will enhance rental income. For ICRA’s sample set, occupancy rates are projected to remain robust at 93-95% in FY2024, with rental income and net operating income (NOI) expected to grow by 30-32% YoY each in FY2025. The agency also forecasts that gross debt will increase by 11-13% in FY2025 due to financing for under-construction capacities. However, leverage ratios are expected to improve, with the Debt/NOI ratio likely to drop to a comfortable range of 5.3-5.5x by March 2025, compared to 6.3x in March 2024. Coverage indicators, as measured by the debt service coverage ratio (DSCR), are anticipated to hold steady at 1.5-1.6 times in FY2025, up from 1.4 times in FY2024. This optimistic trajectory underscores the sector’s resilience and adaptability, positioning it favourably for sustainable growth in the coming years.