Global data consumption has increased rapidly in recent years. The total data consumed globally was 79 billion TB in 2021 and is expected to reach 181 billion TB by 2025. Of this, only 1 billion TB was stored in data centres. This gap highlights the growing need and demand for data centres as critical infrastructure.

Data centre REITs

The US is the only market that has matured in terms of data centre real estate investment trusts (REITs). During 2020, most of the asset class REITs listed in the US were adversely impacted by the pandemic. However, data centre REITs were the best-performing asset, offering an annual total return of 21 per cent. With the economic recovery in 2021, all REITs generated highly positive returns, but data centres remained stable with returns of nearly 25 per cent. This highlights the less volatile nature of the data centre asset class relative to several other REITs. In addition, data centre REITs are constantly overperforming. Over the past seven years, data centre REITs have remained consistently stable and range-bound, providing an effective hedge against other REITs. This makes them an attractive option for public and pri­vate equity investors.

Characteristics of data centres as an asset class

  • The data centre asset class is an amalgamation of real estate, infrastructure and technology, although with highly specialised specifications.
  • This asset class has very long lease ten­u­res, generally around 10 years, with cli­ents. Hyperscale customers can execute up to even 30-year contracts. This gives more stability and visibility to investors.
  • They offer an additional earning potential on interconnection, managed services, managed infrastructure, etc. Thus, the ability to gain an alpha over regular returns is higher.
  • Customer stickiness is extremely high in the data centre asset class, not just on price but also on a bunch of critical technical criteria. This is because it is not ea­sy to migrate servers between data ce­n­tres and customers would rather scale in the same data centre. This leads to lower risk for investors.
  • There is a saturation of opportunities and compressed yields in conventional real estate in certain markets. The data centre asset class allows diversification for investors, with its downside protection and low risk.

Investment drivers in India

The size of the data centre industry in India was $5.6 billion as of March 31, 2021. The overall revenue of the data centre industry jumped from $385 million in 2014 to $1.2 billion in 2021 and has grown at the rate of 10 per cent per annum over the past two years. Meanwhile, the earnings before interest, taxes, depreciation and amortisation (EBITDA) margin improved significantly from 24 per cent in 2019 to 33 per cent in 2021, indicating improved operational efficiencies and economies of scale coming into the industry. In addition, India has the second-highest average traffic per smartphone in the world with an internet penetration of 45 per cent. The country ac­counted for 14 per cent of the total mobile subscriptions and 15 per cent of the total mobile data traffic globally in 2021. How­ever, the number of data centres and their capacity constitute only 3 per cent and 6 per cent of the global total respectively. The huge gap and opportunities that it br­ings have attracted investors to India’s data centre industry.

Data centre investment landscape

The data centre capacity coming up in India is estimated to be 1 GW until 2025. The estimated capital required for building this capacity will be nearly $5 billion. The equity capital required will be $2 billion (assumed based on leverage margins), of which $0.5 billion has already been deployed. The equity capital still required is thus $1.5 billion. Around $5.6 billion of equity investments or commitments have been made in the country since 2020. There is a huge amount of capital chasing limited investment opportunities in the market. The industry is skewed towards the hyperscale and wholesale colocation market and capital is available only for such opportunities, while the risk appetite for retail colocation seems relatively low.

Investment trajectory

The global capital flowing into the data centre industry comes primarily from bulge-bracket private equity investors, while domestic private equity players are also gearing up to enter the fray. The year 2021 was a notable one for the industry as large joint ventures were announced. Meanwhile, hyperscalers are also committing to investing in digital infrastructure in India. For instance, Google, Amazon Web Services and Microsoft have made investment commitments of around $10 billion, $1.6 billion and $2 billion respectively. There has also been a shifting trend of creating platforms that are directed towards a future REIT listing.

Risks and returns

The risks involved in the data centre asset class include speculative developments; complex process of land acquisition in India with possibilities of issues regarding title, government records and transfer approvals/ charges; and stringent service-level agreements and consequences of breach. Mean­while, 18-22 per cent returns are sought by core and growth investors.

Based on a presentation by Devi Shankar, President, Industrial and Logistics, Data Centres, ANAROCK Capital