India’s Maiden Warehousing Fund

Welspun One 2 is the only fund in India that allows domestic pool of capital (HNIs / Family Offices / Institutions) an opportunity to participate in warehousing development projects via a SEBI registered AIF. Investors get to see the full cycle of Buy-Lease-Build-Exit thus getting an opportunity to derive returns from the whole value chain. The Fund effectively enables ownership in a physical real estate project but at the same time removes the hassles viz. buying, project planning and execution, leasing, rent collection, maintenance, large ticket size, illiquidity/ exits etc. that come with conventional real estate ownership.

The Fund can be a great investment option in the asset allocation model for HNIs, Family Offices, Corporates, Insurance companies, Pension Funds that are seeking to add tangible real estate investment in their portfolio but in the form of financial units (financialization of real estate).

The Fund’s offering has a moderate-aggressive risk profile. The Fund is a closed-ended illiquid product with limited or zero distributions anticipated through the life of the Fund and potential for capital appreciation at the end of the Fund life. However, there is no guarantee/assurances of returns or protection of capital. The Fund is exposed to various risks including systemic, market, economic, political and business risks. Please refer to the Fund's PPM for a more detailed account of the same.

The Fund tenure is 6 years from the first close, and is extendable by two periods of 1 year each, subject to consent of two-third majority of investors.

The Fund is targeting Gross IRR of ~20-21%^1,2,3.

¹ Gross deal level returns, pre-fund level fee, promote and taxes; Deal level returns are net of all projects level costs including approval costs, construction costs and fees which may be paid to vendors, consultants or brokers, including an affiliate of Welspun One

² Returns are subject to market risks and there is no guarantee of achieving target returns or protection of capital; please refer scheme documentation for a detailed account of risks

³Estimated IRR based on Welspun One underwriting

The returns are not guaranteed as the investments are subject to various systemic, market, economic, political and business risks. Please refer to the Fund's PPM for a more detailed account of the same.

Investing in a 10 year G-Sec / AAA papers is akin to investing in a debt paper albeit backed by the government / corporate. The return profile is fixed and there are no interim escalations and if held to maturity there is no element of appreciation. Investing in Welspun One Fund 2 on the other hand entails ownership of the underlying real asset, deriving value through the full development and exit cycle, having annual escalations and potential of capital appreciation at the time of exit. Moreover, the Fund’s investments are backed by the underlying real assets, hence offering an element of downside protection. The Fund is expected to generate gross development returns of ~20-21%, with net pre-tax returns in the hands of investors of ~14- 17%, vs. ~6-9% in G-Sec / AAA rated bonds.

Welspun One has adopted an integrated fund and development model, wherein all activities across the project lifecycle, starting from land acquisition to lease, development and sale of the completed, cash flowing asset, are managed by the in-house Welspun One team. This enables Welspun One to maintain the highest levels of governance and transparency and tighter controls on project execution and delivery, thereby minimising cost and time overruns. The Fund is thus able to capture value across the entire project lifecycle and generate “Development Profits” of ~20- 21% Gross IRR, instead of typical pre-leased asset return of ~13-14%.

Welspun One and Welspun World, as sponsor/anchor investors, shall jointly commit INR 75Cr in the Fund. This will ensure alignment of interest between Welspun One and Welspun World, as well as the other Fund investors. A similar amount was committed in Welspun One Fund 1 as well.

The warehouses are leased to blue chip tenants with strong balance sheets from various sectors including e-commerce, third party logistics (3PL), retail, FMCG, etc. Some of the marquee tenants included in Welspun One Fund 1 portfolio are Delhivery, Ecom Express (backed by Warburg Pincus), FM Logistics, Asian Paints, Tata Croma, Flipkart (backed by Walmart) and Emiza. There has been instance of repeat tenants across multiple locations.

Warehousing leases are typically long term in nature with tenure of ~9+ years and lock-in of ~3-5 years. Warehousing leases typically have a built in escalation clause of ~4.5-5% p.a. If the tenant annuls the contract prior to expiry of lease term, the tenant has to pay for the remaining duration of lock in period. However an important point to note here is that the fitouts cost incurred by the tenant before moving in are very high and they typically get amortised over the life of the lease. Hence moving out of the warehouse before the lease period ends is a loss making proposition for the tenants making the lease sticky.

The Fund typically invests in projects at a “greenfield” or land stage. At this stage, there are typically no formal contracted pre-lease arrangements with tenants and such arrangements are usually possible only post acquisition of the land. However, as a strategy Welspun One de-risks each acquisition by a detailed market diligence including potential demand for the subject site and competing supply. Welspun One also seeks informal or soft commitments from tenants. Basis these comforts Welspun One proceeds to acquire the land. Once the land is bought, meaningful capex towards construction is only done after signing lease commitments with tenants and after the tenant has paid a security deposit.

The Logistics and Warehousing sector have been awarded infrastructure status by the government, hence the construction finance for our projects is easily available at favourable rates from various leading banks. Further, banks look at this asset class favourably since, given most of the development takes place post leasing there is a guaranteed take out for the bank by way of rental securitization. In Fund 1, we have obtained funding from HDFC Bank for our Bhiwandi asset and IndusInd Bank for Lucknow, Farrukhnagar (Gurgaon) and Bangalore assets.

Welspun One’s development management team offers asset management services to the project entities, which will also include rent collection among other services. We have a dedicated inhouse rent collection team that ensures continuity and red flags for any discrepancies. From the rent continuity perspective, there are enough safeguards that have been put in place. The warehouses are leased to blue chip tenants with strong balance sheets. Warehousing rent typically forms ~15-20% of total logistics cost hence sensitivity to overall logistics cost due to increase in rents is not so high. Further, warehousing forms a critical part in a business’ supply chain operations and the fit out costs incurred by the tenants are very high. All these factors reduce the chances of default in warehousing leases. Lastly lease agreement with tenants capture adequate penal provisions to protect the lessor in case of a default, including forfeiture of security deposits.

The Fund will primarily invest in warehousing development projects and exit completed, rentgenerating asset to institutional buyers/ REITs or INVITs. There is a huge demand from institutional buyers for Grade A compliant warehousing assets. Recent deals include Hillhouse capital buying a Morgan Stanley asset for USD 83MM, Blackstone buying the Embassy portfolio for USD 700MM, Canadian Pension Plan Investment Board committing USD 500MM with Indospace, Mapletree buying select Morgan Stanley assets for USD 63MM to name a few. The gain from Fund’s investment will be realised in the form of capital gains at the time of exit from projects, hence the distribution to the Fund investors shall also be back-ended, closer to the end of Fund term. In case some of the projects are exited sooner than end of the Fund term, realisation from such projects shall be distributed to the investors sooner.

Grade A warehousing assets offer stable yield of ~7-8% p.a., with contracted escalation of ~5% p.a., giving them unlevered returns of 12-13% which can be further improved by leverage. Such a return profile, backed by real assets and long term leases to high quality tenants is attractive for these investors. Post Covid-19, warehousing also emerged as a resilient asset class as it was less impacted compared to other real estate segments given its critical role in business’ supply chain operations. As a result, it has gained prominence in asset allocation strategy of various institutional investors due to superior risk return matrix and longevity.

Welspun One’s Fund 1 and Fund 2 are the only SEBI registered category 2 AIFs offering domestic investors an opportunity to participate in the warehousing development segment in a transparent, organized and institutional manner.
There are few other institutional developers engaged in warehousing development projects, which are backed by foreign investors (and do not provide participation opportunities to domestic investors) such as Blackstone, Canadian Pension Plan Investment Board, Bain Capital, Morgan Stanley, GIC, Oxford, Temasek and Ivanhoe Cambridge to name a few. These investors have committed ~USD 6 BN in last 5 years in the Indian warehousing space.

It takes anywhere between 6-9 months from identification of land to acquisition, post completion of various detailed due diligences (title/ legal, technical, financial) and fulfilment of applicable transaction conditions. To ensure efficiency in deployment, monies are paid to acquire the land only after the entire process described above is completed satisfactorily.

Once the land is acquired, the approval timelines vary from state to state, and may range from 3-9 months depending on the state level approval framework and policies.

Thereafter, it takes another 8-9 months to complete construction of each warehouse structure and handover over to a potential tenant. The delivery of all the warehouses in the entire park is staggered (depending on leasing demand) and typically happens in 2-3 phases. Thus, it takes ~2-3 years to complete the construction and delivery of the entire park post land acquisition.

Warehousing developments are horizontal structures, with shorter development cycles and low construction complexity. They involve fewer and faster approvals, and even a large scale warehouse development (~1-2MM sf) project can typically be completed in ~2-3 years post land acquisition. Given horizontal nature of development, each warehouse can operate as a standalone box, completed, leased out and rent generating even while development of the remaining park is underway. Warehouse development is also mostly “built to suit” or “preleased” which means that meaningful capital expenditure is only incurred once a lease commitment is signed with a tenant, thereby minimizing leasing or market risk. Moreover, tenants typically incur significant capex on fit-outs and automation of the warehouses as they form critical part of their business’ supply chain operations, thus leading to an increased demand for long term leases, which helps them in efficient amortisation of capex over the lease term.

On the other hand, commercial properties have vertical structures, with long development cycle and high construction complexity. The approvals process takes much longer than warehousing, and the entire building needs to be completed in order to commence operations on any floor. It typically takes ~5-6 years since land acquisition to project completion. Such vertical constructions are typically exposed to significant time and cost overruns. Due to the longer delivery cycles, pre-leasing is usually not possible. Moreover, since limited investment is made by tenants in such properties, their leases tend to be shorter term and less sticky than warehousing, and are prone to vacancy risks.

Investment in warehousing via the Fund benefits investors on 2 counts:

1. Investors get to invest in warehousing real estate segment via a financial product, thus avoiding the hassles of owning physical real estate viz. illiquidity, high ticket size, maintenance etc. and instead owning units in their demat account. These financial products are wellregulated and employ a tax efficient structure.
2. Investors get to participate in development projects i.e. right from the land stage through the leasing and development journey to earn attractive development linked returns and get value derived on the entire value chain.

The Fund plans to invest in ~10-12 projects (based on cumulative offer size of INR 1,500- 2,000Cr), and maintain judicious diversification in order to mitigate concentration risks related to single investment exposure, markets and micro-market exposure, tenant-wise exposure and vendor-wise exposure.

The Fund has committed 100% of its net investible corpus in 6 warehousing projects across 5 cities in ~2 years of launch, and is tracking inception-to-date Gross IRR of ~21.1%^1,2,3 . The expected hold-to-maturity Gross IRR is ~20-22%^1,2,3. The Fund is also expecting exits from 2 of its projects in early 2023.

The Fund’s total portfolio has cumulative gross leasable area of ~6.6 million square feet, out of which ~3.1 million square feet has been leased, ~1.0 million square feet has been handed over to tenants and ~2.0 million square feet is on track for delivery by April 2023.

¹ Gross deal level returns, pre-fund level fee, promote and taxes; Deal level returns are net of all projects level costs including approval costs, construction costs and fees which may be paid to vendors, consultants or brokers, including an affiliate of Welspun One

² Returns are subject to market risks and there is no guarantee of achieving target returns or protection of capital; please refer scheme documentation for a detailed account of risks

³ Estimated IRR based on Welspun One underwriting

The Fund has drawndown ~72.5% of total capital commitment or ~INR 366Cr as of November 2022.

The Fund has committed 100% of its net investible corpus as of December 2022.

The Fund has leased warehousing space to blue chip companies from diverse sectors such as 3PL, express logistics, e-commerce, retail and FMCG across its projects. These include marquee players such as Delhivery, Ecom Express, FM Logistics, Asian Paints, Tata Croma, Flipkart and Emiza.

The estimated stabilized entry yield ranges from ~9-10% across various projects.

¹ Gross deal level returns, pre-fund level fee, promote and taxes; Deal level returns are net of all projects level costs including approval costs, construction costs and fees which may be paid to vendors, consultants or brokers, including an affiliate of Welspun One

² Gross deal level returns, pre-fund level fee, promote and taxes; Deal level returns are net of all projects level costs including approval costs, construction costs and fees which may be paid to vendors, consultants or brokers, including an affiliate of Welspun One

³ Estimated IRR based on Welspun One underwriting

Fund 1 investor base includes various high net worth individuals, family offices as well as a provident fund investor.

Welspun One Fund 2 is a SEBI registered Category 2 AIF.

The Fund may accept investments from high net worth individuals, bodies corporate, insurance companies, pension funds, banks, financial institutions, sovereign funds, multilateral institutions and other sophisticated and institutional investors, Hindu undivided family, proprietorship, association, trust, corporation, company, partnership, limited liability partnership, limited liability company, co-operative society, non-banking financial companies, family offices, estates, foreign portfolio investors, government or government agency or authority, any other class of person and any body or organization of individuals or persons whether incorporated or not and whether incorporated in India or outside of India, who are eligible to invest in the Scheme and to hold Units in accordance with applicable law. The Fund can also accept investments from pension funds and charitable institutions subject to their constitutive documents.

The Fund is a close ended fund, and no exit shall be available to investors till the end of the Fund’s tenure.

Investment in Warehousing development projects entail upfront investment towards acquisition of land and key approvals (60-70% of total project equity), and then subsequent investment over a 2-3 year period towards development and construction cost for the project. The Fund will accordingly align its drawdown from investors with the deployment in the project to minimize drag on fund returns. Thus, drawdowns from investors are expected to be made over ~3 years from the final close. The upfront drawdown at the time of on-boarding shall be 20% of commitment amount.

Welspun One, as the investment manager of the Fund, may provide defaulting investor with an opportunity to remedy the default within 15 calendar days from the date of notice to remedy the default. If the default is not cured within the given period, the investment manager may exercise some remedial measures as per the provisions of the PPM including but not limited to charging the defaulting investor interest at 15% (excluding any tax) on the overdue amount, suspension or termination of the rights to make future Capital Contributions and suspension of voting rights. Please refer to the Fund PPM for detailed provisions on consequences of default.

The Fund may offer co-investment opportunities to investors above a certain ticket size in select large deals. The Fund would offer co-investment only after investing approximately 15% of its net investible corpus in the given deal.

The Fund shall invest such amount in liquid mutual funds or bank deposits or other liquid assets of higher quality such as treasury bills, triparty repo dealing and settlement, commercial papers, certificates of deposits, etc. as permitted under the AIF regulations.

The final close shall held within a period of 12 months from the first close, subject to an extension of 6 months by Welspun One, as the investment manager of the fund, in its sole discretion.

In addition to the above, the Fund will also send event-based email updates to investors.

Welspun One strives to attain the highest standards of corporate governance, including high level of transparency and accessibility to its esteemed investors.

With that objective in mind, Welspun One has created an investor portal that is first of its kind in the industry primarily aimed at providing all relevant data to investors at just click of a button.

• Investment details , including details of amount invested, units allotted, amount pending drawdown, next drawdown date, latest NAV, etc.
• Document repository , which allows investors to access the executed contribution agreement, PPM, statement of accounts, tax statements, Fund’s quarterly updates, Fund’s annual reports and any other document issued by the Fund.
• Fund’s portfolio details , including details of investments, status of development, leasing, hand over to tenants, etc. The portal even enables the investors to access details of each project including projected timelines, deployment status, construction milestones, tenants along with live photographs and drone video shoots that will be updated periodically. This would ensure complete transparency between the Fund and the investor.

Welspun One has engaged an 18 member E&Y team, manned by a resident E&Y partner and working out of various project site offices, that does concurrent audit on all site processes. A concurrent audit is done pre-facto, wherein whenever a bill is raised by a contractor, the E&Y team first audits whether the job is completed as per the contracted conditions and only after the team is satisfied with the quality and timelines of the job, the bill is sent further for processing.

Welspun One also uses extensive technology to conduct weekly reviews on various projects. These reviews are based on a digital project management dashboard, wherein data is updated by the E&Y team only. All Welspun One employees have view-only rights to this dashboard, and thus cannot update/ modify any data. This gives the management team a full, transparent view of project status and can therefore take timely corrective actions to avoid cost and time overruns.

Investors are welcome to visit the site with prior notice of 2 working days.

Welspun One has an in-house team of approx. 140 professionals, in addition to 20 external experts, with deep local / institutional expertise in investments, leasing, development, asset management and audit. Please refer to the fund information deck for organisation structure and profiles of key team members at Welspun One.
A summary of prior experience of key team members is available on request.

Core team of Welspun One has extensive relevant experience in real estate fund management, investment, development as well as leasing. Some of the senior team members have played significant role in warehousing investment, development and leasing. On a cumulative basis, our senior team possesses 325+ years of real estate experience, has transacted ~4,000 acres, delivered ~225 MM sf of project area including ~65MM sf of warehousing area. Please refer to the fund information deck to know more about relevant experience of the team.
A summary of prior experience of key team members is available on request.

Welspun One has adopted an integrated fund and development model, wherein all activities across the project lifecycle, starting from land acquisition to lease, development and sale of cash flowing asset, are managed by Welspun One, without dependence on external developers. This enables Welspun One to maintain tighter controls on project execution and delivery, thereby minimising cost and time overruns. The Fund is thus able to capture value across the entire project lifecycle and generate “Development Profit” of 20-21%, instead of typical pre-leased asset return 13-14%.
The Welspun One team is currently staffed to manage acquisitions of ~200-250acres of land parcels, leasing and delivery of ~3-4MM sf p.a.

The Fund will invest in project entities primarily in the form of unlisted equity shares, and exit via sale of these equity shares after completion (development and lease) of the project, which is typically expected to take ~2-3 years. Hence the income of the Fund will primarily be in the nature of long term capital gains for taxation purpose.

Since SEBI registered Category 2 AIF has a pass through status under income tax regulations for all income other than business income, any capital gains earned by the Fund will be taxed directly in the hands of the investors. At the same time, indexation benefit applicable on the instrument, through which the Fund makes its investment in project entities, will also be available to the end investors.

The applicable tax rate for long term capital gains on unlisted shares for resident investors is 20% + surcharge (applicable to the investor) + cess.

Please note that the above rate is only indicative in nature, and you are requested to consult your tax advisor for detailed advice.

In case of an individual, the following documents are required - CVL verification, identity proof, address proof (Aadhar card in case of resident individual), PAN Card and cancelled cheque. In case of a non-individual, the following documents are required – the authorized signatory list, board resolution, address proof, UBO (Ultimate Beneficiary Owner) declaration and shareholding pattern.

There is a digital process available for on-boarding, which allows for online execution of documents.

We are in the process of obtaining Fund Management rating from a leading rating agency.