High growth in Asia Pacific data center market to attract more investments
The data center industry withstood the pandemic servicing data-driven economies.Technology,innovation and sustainability would be key differentiator going ahead
Data center industry withstood the pandemic as it serviced data-driven economies across the globe. The positive sentiment was also reflected in the performance of listed REITs in the US markets. Office market REITs were down 24%, retail was negative 36%, hotels were down by 49%, while industrial and data centers were up by 2.3% and 19% respectively. This highlights the strong interest of both data center operators and investors.
The data center industry in Asia Pacific continues to grow with few qualified operators. Those with the ability to scale-up have been attracting high valuations. The pandemic was not a significant tailwind, as the industry growth was driven by increasing cloud adoption and data storage since last few years.
Investment strategies and valuation play
The data center industry has been attracting high valuations. Large capital is chasing a few players with core competencies and the ability to scale up across regions. Businesses with the ability to build scale in the post pandemic scenario will get differentiated very quickly.
Sales and leaseback are one of the fastest ways to enter a new market, but to be successful, one should be able to create more value from the asset. This can be achieved by making technological changes as may be apt to local customers, adding global customers and increasing utilisation levels. Telecom carve-out is a transformation play to meet third-party demands depending on the market. The operator must adopt a three-way strategy of combination, carve-outs, and greenfield which is required for building a multi-country platform. In this process, a speculative built up strategy could work in a scenario of increasing demand as scaling time would lead to missing on opportunities. Investments in built-to-suit (BTS) models for hyperscale operators are expected to give single-digit returns, whereas an operator would earn a higher return due to the business and operational risk.
India’s data center landscape
Data is one of the largest and fastest-growing commodities and India is leapfrogging in this field. However, there has been a lag in enabling infrastructure development like cable landing stations, technology and networks. Governments, both at the state and center are enacting legislations which will address the concerns as well as give a boost to the sector. Growth prospects have led to a surge in supply pipeline which may find it challenging to keep its promise on time and quality. The entire ecosystem from developer, operator and other service provider needs to be in place if India must establish itself as the data center leader.
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Indian colocation industry is expected to add ~700 MW during 2020-25 as per a recent JLL report. Apart from this committed supply, additional upgrades backed by new investments are expected. Most operators are adopting a land banking strategy for scalability. The adjusted land cost (FSI of 1.5 to 2.2) based on hyperscale design is around INR 1,500 per sq ft while the construction cost of the shell (building) is around INR 2,800 to 5,000 based on the design. So, the overall hyperscale data centre built cost ranges from USD 200-400 per sq ft while the MEP cost ranges from USD 5 to 5.5 million.
Warehousing and data center: Comparing speculative builds
Speculative builds in data centers exist where hyperscalers have committed 50-60% space, since it is expected that the tenant would eventually take up the rest as well, as demand has been outstripping supply. Though a similar scenario exists in warehousing, the built-up dollar cost in data centers is much higher than warehousing, hence not comparable. Data center trends in Asia Pacific indicate that demand has been over stripping supply leading to tighter markets. Firm pricing trends in markets across the region indicate that there is not much speculative build as perceived. However, rush of many players in the space may lead to competitive pricing in future.
In data centers, technology, innovation and sustainability would be the key differentiator going ahead. Players will have to create a niche in their areas based on customer requirements and technological innovation. Large hyperscale customers who aim for carbon neutral or carbon negative will be looking at operators who provide sustainable energy alternatives. The green energy approach will occupy centre-stage and those who can provide this solution will be preferred.
The concept of sustainability is not just limited to the renewable power supply but is applicable across the value chain. It starts from sustainable building material, design, construction, energy efficiency etc. Apart from Power Usage Effectiveness (PUE) which focuses on power efficiency, the backup power must be sourced from renewable energy, unlike the current dependence on fossil fuels. Going ahead, countries with the advantage of the land and renewable power will not only have data corridor but renewable power supply corridor running undersea providing green power to countries with scarce resources.
Data is the largest and fastest-growing commodity and trends in technology, sustainability and legislations will define the next wave of growth.
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