Data Centres to Drive Growth of Commercial Real Estate.

The growth in the data centre market is propelled by structural change in consumer economy.

we live in unprecedented times. Real estate, which forms the backbone of several other industries, was severely impacted in the first half of 2020 due to all construction coming to a grinding halt and potential homebuyers being cash-strapped. The rise in work-from-home culture further disrupted the commercial realty segment, putting a variety of businesses in jeopardy. Despite the growth of residential and commercial segments being temporarily interrupted, there was one particular category that continued to thrive amid the pandemic: Data Centres.

The Rising Demand for Data Centres

The nationwide lockdown jolted the entire Indian economy towards digitization at an incredible rate. While India's transformation into a 'digital economy' over the years certainly helped, the social distancing restrictions induced by the pandemic such as work-from-home compliances and increasing dependence on technology and data have truly unleashed the potential of data centres. Even in Budget 2020, the government's focus on the introduction of a policy to build data centre parks throughout the country reiterated on the importance of this segment in contributing to India's development. As the finance minister remarked, data is the new oil indeed and it is high time for India to have advanced infrastructure that can further its agenda of becoming a major superpower. 

As per market reports, the data centre market in India was almost about 9 million sq.ft. by the end of 2019 and is expected to increase by 1.5 times (leading to a total stock of 24 million sqft.) by 2025. Within first half of 2020, there has already been a capacity addition of 27 MW, which is 56% of capacity addition of 2019 (47 MW). The growth in the data centre market is not only propelled by short term events such as Covid-19, but also structural change in consumer economy. It is estimated that over 1 billion people in India will have access to internet by 2030. UPI payments are expected to surpass both Mastercard and Visa by number of transactions in next 3 years. Digitally-savvy generations Z-ers, Draft Data Protection Bill prioritizing local data storage, increasing automated economy, evolving start-up ecosystems, are some of the other factors contributing to the rising demand for data centres.

Key Drivers of Data Centres

Globally, there is a massive demand for data centres in order to address challenges around business continuity. Closer home, there is strong latent demand, that is yet to be met by local supply. The current market is dominated by hyper-scalers with most existing players following a cloud and co-location combination approach. Data centres need to be viewed as a separate asset class, undergoing the same learning curve, as was experienced by the IT sector in India.

At the recently concluded forum RICS e-Leadership Forum where the Presenting Partner was Intellion by Tata Realty and Knowledge Partner was CBRE India, it was reiterated that India is a land of opportunities for data centres. Almost unanimously, it was agreed that there are three major drivers contributing to the growth trajectory of data centres in the new normal: technological, commercial and legal/regulatory.

Technological: The increasing automated demand, changing demographic pattern, and increased level of remote working are all contributory factors to the rise of the segment. The emergence of 5G & IoT is set to drive demand for the segment. A strong cutting-edge infrastructure will help to scale-up this demand. India already has been the global outsourcing centre; and the country just needs to leverage the advantage it has to become a regional hub when it comes to data centres.

Commercial: Hyper-scalers control the market and will drive a big chunk of the demand. But there is some space reserved for retail. The segment has grown substantially during Covid -19 and will continue to flourish, due to its sustainable business model. With the rate of return being stable, there is room for both national and global players in the segment.

This is a unique opportunity for investors as the market for the segment will continue to expand. A change in mindset will be essential for investors to look at very long-term partnerships, as the segment does not offer quick returns. It's a multi-billion investment opportunity, which provides long term stable returns. In comparison to other countries, the ROI is extremely competitive in India. There is also a lot of opportunity in REITs for data centres, once the taxation challenges are resolved. It is imperative to find the right balance.

Legal/Regulatory: Developers and occupiers must educate each other, as the segment is currently at a nascent stage. The legal environment can be made investment friendly by adopting global benchmarks to the local policy framework. India is capable of providing a friendlier investor environment with robust infrastructure, supporting growth of the segment.

Despite the current situation, from a sustenance perspective, we are confident that commercial real estate will continue to be one of the major growth drivers for the progress of Indian realty sector in the coming years. Commercial real estate is a very organized sector with India's Grade A office Space Stock in top 8 cities exceeding 650 mnsqft. With the advent of new segments like data centres and REITs, the recovery of the sector will be much faster. In line with this, Tata Realty is exploring opportunities to build data centres at the locations where the company is constructing IT parks. This sudden yet sustainable demand for data centres has started producing rich dividends for players present in the segment who have already started seen phenomenal growth. With India's ever increasing population adopting the digital way of life, it is clear that the nation is ready for this demand of data centres, but the onus is on stakeholders to live up to the demand and build a strong digital infrastructure to support the dreams of a modern India.

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