As the data centre industry in India evolves, there will be compression in yields, with multiple stable and operating assets with the varied class of investors pitching in.
As far as the physical space industry is concerned, a lot has developed and been spoken on residential, commercial, and the retail sector over the years. We witnessed substantial growth in the warehousing and logistics space. There are multiple platforms - small and large for these asset classes, with Indian and global investors vying for a pie in the cake. Now, data centre is one of the most talked-about business within the real estate space. Data centre business is not new in India; any corporate - be it banking, telecom, research & development, e-commerce, all would need a central reservoir for storing and processing data.
Until the recent past, all this data has been stored locally and maybe in the same building, and companies would have scattered data storing and processing across locations. With businesses growing and the amount of data and technology changing, there is a need to have a specialist business that could run the business in a fast-changing technology era. This gives way to the availability of multiple options for campus style data centre development in various cities helping portfolio optimisation.
Various business models have evolved considering the users′ requirements and operating efficiencies, leading to different types of data centres, including enterprise, managed services, colocation, and cloud. There is a spectacular increase in data consumption globally, and India continues to outnumber the growth in data.
India's growth in data usage is driven by multiple factors: rising data consumption and cheap tariffs, mobile data traffic per smartphone is forecast to touch 25 GB per month by 2025 from 12 GB in 2019. 5G to represent 18 per cent of mobile subscriptions by 2025. Over 41 per cent of Indians will be upgrading after the launch of 5G, expected to result in a 3X rise in data traffic and 410 million additional users by 2025. 40 per cent of the enterprises are expected to use the cloud for their applications.
Cloud adoption of Indian enterprises is disrupting traditional data storage and management practices. The ongoing pandemic has increased digitisation, providing an impetus to data centres. Banking & digital economy likely to be at the centre of data growth, India has registered a growth of 10X from 2.4 digital transactions per capita per annum in March-14 to 22.4 in March 2019. Further, RBI and India′s government are aiming to achieve 220 annualised per capita transactions volume by March 2021. India's e-commerce sector is among the fastest-growing, with an increase in 3 times the business size in the last three years.
India's presence in the data centre business remains minimal compared to captive demand and its advantages. India has about 600 megawatts (MW) of co-location data centre capacity, for over 500 million active internet users, compared to Europe's 8,600 MW data centre capacity for 460 million users, indicating under penetration of the Indian market. The critical element is creating a favourable ecosystem for data centre for developers, operators, and investors to invest/ operate and succeed.
The situation compares with what happened in commercial real estate in India between 2006-2010, where real estate players entered the market with large projects supported by global capital, and target customers were not global occupiers. Government policies are supported by providing several fiscal and monetary benefits. This leads to the creation of a strong business model with world-class infrastructure and India′s continuing to enjoy among the highest Foreign Direct Investment in Office with multiple REITs, and Investors have seen the entire cycle of investments successfully.
Data centre business in India, today, is at a comparable stage to what office market was over a decade ago, where there is a strong domestic and international demand. Indian players are creating world-class infrastructure to the likes of Hiranandani operated by Yotta, global players like Capitaland building and operating data centres, and many others are either operating or looking to build. The latest built are of world-class quality with Tier IV certification, highly scalable with hyper density Green Power. Government policies are evolving, with certain State Governments providing support in Land Acquisition, fiscal benefits. Availability of land, necessary permits, power, fibre optic connectivity have been critical for data centre business operations. At this point, the data centre business likely to provide yield in the range of 16-18 per cent India which is attractive for stable and operating assets.
The critical risk to be assumed is the operations as demand is strong both within India and globally. As the data centre industry in India evolves, there will be compression in yields. There would be multiple stable and operating assets with the varied class of Investors, and asset prices will begin to go up. Hence, the next 2-3 years could be most attractive to invest in the data centre business in India with higher returns and significant upside potential. Data centre as an asset class caters to a wide range of investors across Infrastructure, technology, private equity, and not necessarily real estate focused. Large developers, such as Hiranandani, Adani are making big investments in data centres. We are likely to see some large global investors forming data centre focused investment platform. Over the next 3-5 years, with business maturing, there is a high likelihood that some large data centre assets could be sold to existing REIT and/or there could be Data Centre REIT as well.
Piyush Gupta is the Managing Director, Capital Markets & Investment Services at Colliers International India.