Data centres: The next big asset class in India’s real estate market?

[ecis2016.org] We look at the potential for data centres as an emerging asset segment in India’s commercial real estate market and the potential returns on investment that it offers

The demand for space to set up data centres has witnessed a huge increase, owing to digitisation in the aftermath of the Coronavirus pandemic. India’s transformation into a ‘digital economy’, has also helped this trend. Consequently, data centres (DCs) are evolving as an alternative real estate asset class with huge potential and leading real estate developers are entering this segment, in a bid to reap high returns from early investments.

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“The COVID-19 lock-downs accelerated the adoption of digital and online mediums, driving huge quantities of data usage. As India shifted to a ‘work-from-home’ mode, virtual, streaming and remote working via digital mode became the norm. Banking, entertainment and education moved online, leading to the demand for data centre businesses to expand exponentially. Initially, a large quantum of Indian data was being stored across global data centres in other countries. The government subsequently brought in regulations, including data protection, data localisation and privacy, which opened up the domestic data centre market,” says Niranjan Hiranandani, founder and MD, Hiranandani Group, and national president, NAREDCO.

Will data centres be the next big asset class in Indian realty?

India holds potential for huge growth in data centres, driven by policy initiatives, widening customer base and expanding corporate requirements for data storage. The ‘Digital India’ campaign by the government, has also given a fillip to this segment. “Technology is now an integral part of life, embedded in working, entertainment and consumption of goods and services, be it e-commerce, tele-medicine, online education, etc. All these add to the quantum of data, effectively increasing business for data centres. The expansion of internet usage at a cost-effective price that offers convenience and comfort, leads to increase in data users and usage. There is a need to secure and store data. Hence, huge demand is expected, in the business of data centres,” adds Hiranandani.

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Ram Chandnani, managing director, advisory and transactions services, CBRE India, says, “According to the Department of Telecom (DoT) in April 2020, India’s internet consumption rose by 13% since the nationwide lockdown in March. Large technology companies and corporates from the fintech, pharmaceutical, e-commerce, media, education, manufacturing, retail and hospitality sectors, as well as large cloud service providers, are likely to drive the demand for data centres. Technology and automation will pay a key role, in terms of how data centres evolve over the next three to five years. In India, DCs will continue to enable the digital world, which has become more crucial than ever during this time.”

“As India has the world’s second-largest number of social media users, tech companies are focusing on the region as a hub for data analysis, says Hiranandani. “India has grown to 296 million Indian wireless data subscribers in the past five years. So, there is a huge scope of data storage space requirement, while the analysis aspect will enhance the growth potential of data centre business. For an investor, this is the perfect scenario to explore as an investment option,” says Hiranandani, whose company already has a data centre at Panvel (Yotta NM1) and is looking to build other centres at Chennai and the National Capital Region.

Which are the hotspots for data centres in India?

According to CBRE, the need for data storage will grow, resulting in a substantial addition to the DC stock during 2020-21, which would lead to the country’s capacity crossing 600 MW (megawatts). The supply addition is likely to be dominated by global players or leading domestic operators, in the cities of Mumbai, Chennai, Hyderabad and Delhi-NCR.

“Supporting the growth of DCs in India, Mumbai is the largest market, with a capacity of 215 MW (as of Q1 2020). The city is expected to witness a supply addition of about 100 MW between Q2 2020 and 2022, fuelled by investments from global and domestic corporates. Meanwhile, in Chennai, subsidies for DC development, coupled with the region being a secondary or disaster recovery site, have boosted activity. With a current capacity of 68 MW (as of Q1 2020), the city is expected to witness supply addition of 40 MW during Q2 2020 to 2022,” states Chandnani.

How will data centres impact the Indian real estate market?

There is synergy between rising demand for data centres and demand for commercial real estate. “From a real estate perspective, the demand for data centres in India was not considered to be huge. Most data centre projects could not be classified as being large, in terms of size. Nevertheless, in the last few years, the regulatory and policy-based incentives, have led to a spike in demand. So, the number of data centres has increased and larger-sized data centre projects are being planned. The new hotspots for data centres, such as Mumbai, Hyderabad, Bengaluru and Chennai, are hubs for IT and BFSI (banking, financial services and insurance)-related businesses. These have traditionally powered real estate growth in these cities. There is demand for hyper-scale data centres in these cities, to cater the rising demand, which means potential commercial real estate demand will definitely witness a surge,” explains Hiranandani.

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According to a report by Cushman and Wakefield, the amount of data stored in India is expected to skyrocket from 40,000 petabytes in 2010 to 2.3 million petabytes in 2020. This has led to a flurry of investment across the nation. The demand for hyper-scale data centres is on the rise, as a result of the government’s push, in terms of the national E-commerce Policy and proposed policy on DC parks. With the ‘new normal’ due to COVID-19, reliance on technology has increased and a tremendous growth story for data centres in India is on the anvil.

Hiranandani points out that investment in real estate works on two parameters – capital appreciation over a period of time and rental yields – and on both parameters, data centres in India are evoking enhanced interest from investors, including global players.

What kind of returns can investors expect from the data centre segment?

Data centres were identified as one of the top five alternate real estate investment options and India emerged as one of the top investment destinations across APAC (Asia-Pacific) as per CBRE’s APAC Investor Intentions Survey, 2019. CBRE’s 2020 Asia Pacific Investor Intentions Survey found that when it comes to preferred alternate segments, about 30% of respondents across the region considered investing in DCs in 2020, a substantial increase from 18% recorded in 2019. Many developers are also foraying into this sector as it has the potential to generate 10%-14% rental yield annually.

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Data centers are also becoming a popular method diversifying real estate investment portfolios, states, Khetsi Barot, executive director, The Guardians Real Estate Advisory. “The 5G-enabled emerging technologies such as the internet of things (IoT), AI (artificial intelligence) and ML (machine learning) will generate substantial data to be stored in huge amounts of space. The recent announcements by the Japanese tech firm NTT, involving investment of USD 2 billion and the launch of data centre projects by leading developers of the country, all reveal the attractiveness of the segment. What talks volumes about the evolution of the data centres and parks segment in India is that a recently completed 0.82-million sq ft data centre in Navi Mumbai, India, is today Asia’s largest and world’s second-largest data park. This reflects the bright future in the investment of USD 15 billion committed by leading corporations like, Oracle, Reliance, Adani and others. Yield generated by DCs will out-do the yields from commercial properties. As digital data becomes critical to business operations and end consumers, India’s need for data centres will rise, as well. This growing demand presents an opportunity for investors to earn steady, long-term returns,” concludes Barot.

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