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Data Center Update: H1 2022

The DC industry supply grew by 16 percent, from 551MW for year-ended 2021 to 637MW as of H1 2022, thus creating 86MW additional supply. And 681MW capacity is expected to be added, leading to a doubling of capacity to 1318MW by end of 2024.

The sustained and growing pace of digitalization has been one of the positive impacts that the pandemic left on us. For instance, the digital payments volume in India jumped by 64 percent to 95 transactions per second in FY-22 from 58 transactions per second in FY 21 and average monthly data usage per user rose by 28 percent to 15.8 GB for quarter ended March-22 from 12.3 GB for same period of previous year. The digital entertainment space, Over-the-top (OTT) video streaming market saw a sharp rise in its paid subscriber base to an estimated 70-80 mn in 2021 from 14 mn in 2018, a whopping rise of 5x growth in three years per the CII-BCG report. With government digital initiatives and support from various stakeholders, a significant transformation has been witnessed in sectors like education, healthcare, e-commerce and life sciences. This has led to strong growth for data center storage and computing which is reflected in the continued growth of the Indian Data Center (DC) industry.

The DC industry supply grew by 16 percent to 637MW as of H1 2022 from 551MW for year-ended 2021 leading to 86MW of additional supply during the first half of 2022. The strong growth has been led by the delivery of pre-committed supply to hyperscale cloud service providers (CSP). Construction development picked pace after the waning of the pandemic and led to increased delivery volumes. Some operators adopted retrofitting of existing buildings to reduce the time of delivery. Supply has been mostly concentrated in Mumbai due to the stable DC infrastructure of submarine cable connectivity and power availability along with a large user market. Mumbai and Chennai together accounted for 83 percent of the supply during the first half of 2022.

Data center demand is in sync with the supply and witnessed robust growth with estimated absorption of 89 MW during the first half of 2022, as against 47MW during H1 2021. The major share of demand has been from the CSPs which have been witnessing strong demand. As per IDC, India’s public cloud market is expected to grow at a CAGR of 24 percent during 2021-25. The strong growth of CSPs has resulted in increased colocation DC demand. The colo occupancy increased from 500MW as of 2021 to 589MW as of H1 2022 leading to an 18 percent growth in demand. The tight demand-supply position has led to high occupancy levels of 92.5 percent as of H1 2022.

Like other industries, DC has been equally impacted due to global disruptions, both man-made and natural. Climate change has been at the doorsteps with a sharp rise in temperatures leading to unprecedented drought-like conditions in Europe. On the other hand, some countries have faced high rainfalls posing an operational challenge for existing DCs. This coupled with supply chain disruption caused by the geo-political crisis has added to the complications. The supply disruption of sources of power generation like crude and gas has led to a DC players rethink about setting up capacities. The impact of these outages especially due to sustainability issues is likely to result in a shift of data center operations to other locations. India with its vast geographical resources, thrust on renewable energy, increasing submarine cable connectivity and cost competitiveness is likely to emerge as an alternative data center hub.

Exponential increase in digital transactions driving BFSI demand
BFSI services have been driving the demand for data centers due to the exponential rise in digital payments. As per RBI annual reports, digital payments volumes grew sevenfold from 10 billion in FY 2016-17 to 72 billion transactions in FY 2021-22 registering a 49 percent CAGR. The growth has been higher post-pandemic with FY 2021-22 volumes growing by 64 percent over the previous year.

Indian banks have increasingly adopted artificial intelligence (AI), machine learning, and security applications for providing digital services, automation, productivity improvement, and hybrid work culture. AI is being used to predict credit defaults, red flag possible defaulters, and take prompt corrective actions. Banks have been implementing digital products which are supported through physical infrastructure. The net impact has been a sharp rise in demand for data centers. Most banks and financial intermediaries are migrating from captive to colo/cloud with a hybrid model while shifting their applications.

Global outages and their implications for India
According to Uptime’s 2022 Data Center Resiliency Survey, 80 percent of data center managers and operators have experienced some type of outage in the past three years. The first half of 2022 witnessed several global outages by some cloud service providers on account of various reasons like cut fiber cables, software changes, air system shutdown, fire, and climate changes. The impact of severe climate changes has been faster than expected with data centers facing shutdowns due to the same. The halt in DC operations in Europe due to the sharp rise in temperatures indicates that existing facilities need to be geared to meet such unforeseen climate changes.

In today’s interconnected world, outages mean huge disruption to businesses globally in terms of loss of revenues. As per the Uptime report, more than 60 percent of its survey respondents have faced at least USD 100,000 in total losses, substantially up from 39 percent of those surveyed in 2019.

The impact of these outages especially due to sustainability issues is likely to result in a shift of data center operations to other locations. As the cloud service providers increase their footprint in India, some of the cloud operations from regions impacted by climate change might be shifted to India and other regions in the Asia Pacific.

5G network likely to increase speed by 10x times; smart devices to explode data growth The auction of the 5G spectrum was recently completed covering all telecom circles in the country. The commercial rollout of the 5G has the potential to increase the median download speeds by 10 times as compared to the existing 4G network. The high download speeds and low latency is expected to open up new services for consumers like home broadband, enhanced video, online gaming, and augmented reality/virtual reality services. 5G is projected to account for almost 40 percent of India’s mobile subscriptions–500 million–by the end of 2027 with average data usage of 50GB per month as per Ericsson Mobility report June 2022.

To date, mobile phones have been the major device of data consumption. However, 5G will lead to data generated by many digitally enabled devices –‘smart devices’- from major consumer goods to industrial applications. This is expected to lead to exponential growth in data generation and consequent growth of DCs.

Supply chain disruptions
The strong growth in demand for colocation data centers has led to ambitious construction plans by players. Some of them are trying to reduce the time to market by using retrofit options, while large players have been able to leverage their expansion plans to tie up with vendors for construction and equipment. However, the cost of key raw materials as well labor has increased leading to an escalation in overall costs. The global geopolitical crisis has adversely impacted the availability and prices of key energy inputs required for production and logistics leading to inflation across the value chain. The supply chain disruption has also led to a shortage of hardware equipment required for the functioning of data centers.

The strong demand for data center construction would mean an increasing need for plant and machinery as well as engineers for the construction. The existing EPC players would be faced with scaling up challenges and the availability of manpower. The equipment suppliers are faced with a continuous rise in requirements.

State of the industry
1.9x growth in absorption during H1 2022 at 89MW
Data center demand witnessed robust growth with estimated absorption of 89MW during the first half of 2022, as against 47MW during H1 2021. The delivery of pre-committed supply to CSPs has led to sharp growth in absorption. Mumbai continues to lead the demand pie with a 65 percent share of absorption since cloud players continue to increase their footprint as the migration to the cloud has been gaining pace. Pune accounted for a 10 percent share due to periodic space taken by hyperscale cloud players while Chennai took up a 9 percent share of total absorption.

Mumbai leads. Delivery of pre-committed space led to 86MW supply during H1 2022-1.6x growth over H1 2021. The supply growth has been in sync with absorption trends as 86MW supply addition has been estimated during H1 2022. Operators have been following the strategy of building capacity based on pre-commitments by hyperscale cloud players with a minimal speculative capacity build. As a result, overall occupancy stood at 92.5 percent of the supply. Mumbai and Chennai together accounted for 83 percent of the supply during the first half of 2022.

Apart from colocation supply, self-build ambitions by CSPs are visible in some DC hubs. Hyderabad has been successful in attracting CSPs to set up self-build capacities by offering regulatory incentives and a proactive approval process by the state government. On the other hand, NCR-Delhi has been able to attract colo operators to set up operations in the region.

DC industry capacity to double. DC industry is expected to add 681MW capacity by end of 2024 leading to a doubling of capacity to 1318MW. Most of these supply additions are backed by pre-commitment from hyperscale cloud players who expect strong growth in cloud services. CSPs are expected totie up with operators who have managed to secure land, power and connectivity availability for scalability. Mumbai is expected to account for 57 percent of the new supply followed by Chennai at 25 percent share.

Supply addition to create 7.8 mn sq ft. real estate demand entailing USD 4.6 billion CapEx. The expected supply addition of 681MW will need 7.8 mn sq ft. of real estate space by 2024. Mumbai on account of the highest share of capacity addition would entail a demand of 4.6 mn sq ft., followed by Chennai at 1.9 mn sq. ft and NCR-Delhi at 0.7mn sq ft. As most DC operators are acquiring land for setting up data centers, they would have to rely on EPC players for the completion of projects. Various regulatory and construction approvals and construction periods would lead to a 3-4 year timeframe for the capacity to become operational. Some players are opting for the conversion of existing office space to DC facilities by using retrofit options to meet technical parameters.

The expected supply addition would entail an investment of USD 4.6 billion during H2 2022-2024. Mumbai will require USD 2.7 billion with a major share of expansion expected in the Navi-Mumbai region. Chennai would require USD 1.1 billion investments while NCR-Delhi would need USD 0.6 billion.

Based on a JLL Research report.

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