Macro Forum: The Street View

Macro Article

Indian Digital Infrastructure Image

Indian Digital Infrastructure

12/6/2021
Ashish Singh

by Ashish Singh
Partner; Real Estate
Mumbai

Ankur Trehan

by Ankur Trehan
Director, Private Equity
Mumbai

Data centres are attracting lots of investor interest in Asia. It is only to be expected as in many of the Asian economies the opportunity is characterised by deep future demand, woefully underserved by the current capacity.

In India alone, the capacity may need to increase as much as 3x or 4x the current capacity of around 500MW IT Load, to cater to the increasing demand over the next 6 to 7 years.

Investors debate whether data centres are real estate or energy infrastructure investments. Data centre customers rely heavily on power and fibre infrastructure and may require tailor-made solutions where power supply is unreliable or relies heavily on non-renewable sources. Many infrastructure players have entered the space, looking to exploit the adjacencies.

In reality though, real estate is as much at the core of data centres as energy.

In economies like India, sourcing sites with easy, cheap access to power and fibre in proximity is a winning start. For a successful site acquisition, a skilled data centre developer must deal with a host of factors.

Firstly, those that define the physical character of the site such as size, shape, access, topography of the site / surroundings, neighbourhood developments, etc.

Secondly, the legal title, tenure, entitlements, etc. And finally, development realities including building bye-laws, massing feasibility, permitting process, planning authority’s sustainability framework, etc.

It is no surprise that a number of data centres have come up on sites within designated industrial zones, which tend to score better on many of these factors, Navi Mumbai being an example. A real estate developer deals with these every day.

In many emerging markets, suitable sites are urban, hence identifying and making a successful acquisition requires the skills of a real estate developer or investor. The granularity of diligence to examine legal title, entitlements and massing feasibility alone requires deep real estate expertise before a successful acquisition.

Then, there is design and planning. Data centre design and planning is closer to specialised industrial facilities than to any other types of buildings. The design process is similar to real estate, and includes preparing a brief followed by hiring consultants and architects for the various stages of design and planning.

There are many decisions to be taken during the design phase, each of which can have meaningful impact on cost and marketability to tenants, and the owner must play an active role throughout. In many emerging markets, another aspect developers may struggle with is the lack of proper code guidance for design of data centres because this is still evolving.

The developer must be prepared to actively engage with the local planning authority in a consultative manner to find common and acceptable ground on many important design factors. This is not new to real estate developers. However, a number of operators who lack the real estate planning skill set are struggling with it, leading to delays in delivery.

Civil construction expertise is also critical to data centre development, as timely delivery is of essence and penalties for delivery delays can be damaging. Where sites may not be ideally shaped or sized, which is often the case in emerging markets, a developer must possess expertise to design and develop optimally within urban or urban-like constraints.

An industrial real estate developer is also familiar with heavy mechanical, electrical and plumbing (MEP) works, and hence can organise and execute sophisticated, modular MEP works.

Real estate experience is central to data centre investors and developers. Those with skills in both real estate and energy infrastructure are thus uniquely positioned to realise the opportunity.