Investor Strategy: Acquiring land for warehousing assets
ONIX Advisors & 4FC This article is a broad overview of land acquisition strategies for individual investors and HNIs. A key and arguably the most difficult part of developing a warehouse for lease is acquiring a suitable land parcel in established and fast growing warehousing hubs of major cities. Below are a few strategies towards acquiring the perfect parcel.
- Outright purchase: This is the most capital intensive model but relatively less risky as ownership of land protects the downside. Land, inarguably, is the most real asset. On top of that, warehousing zones are natural hubs for capital appreciation. Investors with ample liquidity and a long term horizon are bound to reap tremendous returns. On the other hand, land financing is prohibitively expensive. Investors looking to finance their purchase of land with debt should evaluate the risks carefully before making a decision.
- JD and JV: JD stands for Joint Development whereas JV stands for Joint Venture. While both terms are interchangeably used in the majority of the conversations, there is a difference between the two land acquisition strategies. In both arrangements, the upfront capital requirement for acquisition is low. We have further described the two strategies in simple terms:
- In a Joint Development, the investor is responsible for end-to-end development of the warehousing asset. The investor, usually, pays a certain amount upfront to the landlord and promises a certain area/revenue in the fully developed warehousing asset/logistics park. The landlord contributes land. The value creation is done solely by the investor.
- In a Joint Venture, the investor and the landlord are both responsible for developing the project. Usually a JV is a combination of synergies - for instance capital with development capability, that is, one JV partner may get funds for the project while the other may have expertise in dealing with authorities, managing contractors and so on and so forth. In this arrangement, both parties bring certain value and are active investors throughout. Both parties become joint owners of the land.
- Long-term lease: This strategy requires least capital upfront. The investor leases a land parcel for 10+ years usually by paying a refundable security deposit, and agrees to pay a certain rent for the lease period irrespective of occupancy levels after a certain agreed period of time. While the investor stands to benefit from significant rental arbitrage in a normal or growing business environment, the downside isn’t protected; the investor bears all the burden if there is a downturn/a recessionary environment or if competition intensifies in that particular micro-market. Both phenomena lead to occupancy dips and the cash outflow towards rent doesn’t change.
One or more of these strategies may be chosen by studying the micro-market and macro-environment carefully. For additional inputs on land acquisition strategies, please reach us on +91-9108447825 or +91-9108447829.