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Data Centre’s: The Fuel That Will Fire-The Commercial Real Estate Industry

Joeie Malik - January 31, 2021 - - 0 |
DATA CENTERS : THE FUEL THAT WILL FIRE

Data is the new oil. An axiom we hear every day in our lives, and it still doesn’t do justice to data’s importance. This was an observation pre-COVID-19. Well, post-COVID-19, you can safely say that ‘Modern Human Life is a function of data.’ No data, no life. Data is getting the food on the table both literally and metaphorically.

Why is the Indian Data Centre Market this bullish?

Demand for data was humongous before COVID-19. Post COVID-19 words are not enough to describe the situation. A recent report by telecom gear maker Ericsson tells us that Indians were averaging 12 GB of data per month per user. This is the highest globally, and it would be 25 GB per month/per user by 2025. This amounts to 21 exabytes of data per month. We will analyze the reasons for demand later on. The question is, where will this data be kept as Data localization as a policy will be a norm everywhere in the world. Data Localisation is the concept of maintaining data created in a particular nation within that country’s border. The answer is, of course, the ‘Data Centres.’ Do we have enough data centers in the country today to withstand the sort of demand that is there domestically? Then there is a small matter of Global hyper-scalers eyeing India as a preferred destination for their data center needs. Hyperscalers are enormous companies such as Google, Amazon, Microsoft, Facebook, etc.

What is a Data Centre?

Simply put, it is a place where customer’s data is kept for a business in hard drives in a rack. Technically it may not be the best definition, yet it explains in simple words what a DC does. There are other functions that DCs do, but let’s keep those for a separate blog.

Here in India, the Data Centre runs on two models.

(i) Captive: In this case, the company builds and manages DC on its own

(ii) Colocation: These are the ones where a third party builds the dc and maintains it for clients who take up space there.

Once widespread, the Captive units are in decline today as Colocation DC’s save a lot of cost for the companies. Especially in these times, every penny matters.

Demand Analysis

The demand for data will create a need for data centers. By all accounts, the demand for data is enormous today and even bigger tomorrow. Thus, it may not be an exaggeration to say that the need for DC’s will be there as long as there is civilization. India consumes more data than the US and China combined. No wonder McKenzie has identified India as the second fastest-growing digital economy in the world.

The Introduction of 5g will add even more data consumption on the part of Indians.5G will generate at least three times more data consumption and millions of more subscribers. Data Localisation has been a game-changer for the Indian Data Centre industry. Government India’s Data Protection bill mandates that all the financial and critical data be stored in India. It essentially means that all the companies will have to keep their data within India This has led to a barrage of investments in DC’s in India. Another critical factor is Indian companies warming up to being on the cloud. The Indian market witnessed a tremendous demand for online gaming, learning and development portals, video streaming services, etc., during and post lockdown. Experts predict that Automation, AI,5g, and the Internet of Things will create loads of demand for data.

The Government of India has taken a ton of initiatives in pushing the demand for data. To fully utilize Cloud Computing’s power, Govt of India has launched a novel initiative called ‘Meghraj.’ The idea behind this is to accelerate the delivery of e-services. The Government will be increasingly dependent on data centers for Government-to-Citizen (G2C) delivery platforms, such as the National e-Governance Plan (NeGP), e-visa, and National CSR Data portal, among others. Google has pledged to invest about 10 billion USD in the India Digitization fund. These sort of investments in Digitisation will go a long way in pushing the demand for data centers northwards.

According to the Synergy Research Group centers, India’s data center market will grow at a 12% compound annual growth rate (CAGR) from 2019-2024.

Supply Analysis

Let’s assess the supply side of things. Currently, there are 154 colocation data centers in India. It is well short of what is needed. Arizton Advisory and intelligence predict more than $2 billion cumulative revenue opportunity for data center construction contractor through the India market during 2020-2025.

Today, the Indian DC industry is concentrated in Mumbai, Chennai, NCR, Bangalore, Hyderabad, and Pune. Mumbai being the hotspot is no surprise as it’s the country’s datahub owing to it being the country’s financial capital.

Colliers’ recent report says that between January and August 2020, DC’s have attracted investments to the tune of USD396 million, which is virtually a little less than half of the total private equity investment in Real Estate. Such dominance in the market, even in a global pandemic, is truly astonishing. DC has been the lone bright spark in an otherwise gloomy scenario.

Let’s talk about the investment plans by the different players in the segment to get a clearer picture of where things stand today. JLL believes that Data Centres will provide an opportunity of close to 5 billion USD in investments in the next five years. Amazon will invest 2.8 Billion USD in its second data centre in the country. Adani Group will be investing 70000 cr in the next 20 years. Yotta’s data centres are coming in Noida, Mumbai, and Chennai. The Yotta Data Centre part at Greater Noida will be North India’s first hyper-scale data center park. Yotta’s most significant achievement is their tier iv data center by Yotta NM1, located in Panvel. It is the second-largest in the world and India’s largest. Web Werks with data centers in Delhi &Pune and NTT with its global data center in Mumbai are the other players. Among all the players in the market, it is the Adani group that looks the hottest.IT experts predict their data centers to be a class above.

As per Anarock-Mace’s report, about 10 billion USD is either committed or waiting to be committed in the Indian data center market.

The Government of India understands the need for building up new DC’s. Recently Finance Minister Nirmala Sitharaman announced that the Govt is planning to develop a policy that enables the private sector to establish data parks.

Investment Analysis

An investment in Data Centre provides a clear opportunity to be in an asset class that will not only be stable in times to come but steadily increasing as well. Even before the pandemic, data centers were being talked about a lot. After the pandemic, the rate of Digitisation is at an unprecedented rate. Every business realizes the need for Digital First Approach. In a report, Colliers International suggests that a colocation data center should take about six years to break even. Colliers also recommend that Customer Stickiness and high entry barriers make DCs a safe bet for more than 15% yield per annum.

Statistics show that the sector average for returns on Data Centre REITS is 40%. This is, of course, the global markets. Mind you, India is slated for even higher growth rates than the globe based on their skyrocketing demand for data domestically.

Challenges

There are a few challenges which the industry will face. Certain global giants need to fulfill green energy needs as part of their global strategies. This will be challenging in the Indian Market. Reliability of power and land banks where there is a demand for DC’s are the two significant worries for this sector. Poorly built DC’s with dodgy equipment can jeopardize the growth prospects. Hopefully, these will not prove to be deal-breakers as the Govt and other stakeholders have shown substantial intent in tacking this head-on and are committed to resolving any issues about the Indian DC sector.

Final Words

In an increasingly uncertain world, the demand for Data centers seems to be stable and steady. Demand and consumption of data are here to stay. Hence the need for DCs will never fade away. It is going to increase at a rate higher than previously thought about. The DCs will be a significant component in the portfolios of all the major players in the Reality and Technology sectors. In the present scenario, the digital rates, internet penetration, smartphone usage, cloud-based Applications, and overall Govt. policies transformation into digital-friendly processes; all of these together make Data Centers rule the roost in the real estate space for times to come.

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