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Data centre capacity in India has the potential to add another 500 megawatts (MW) over the next four years, according to a new report by Avendus Capital. 

The report titled “Data Centres: Powering Digital India (Volume II)” reveals the surging demand for data centres, driven by the increasing adoption of AI workloads surpassing traditional cloud computing. 

India has emerged as one of the fastest-growing data centre markets worldwide, with the sector doubling in capacity from 540 MW in 2019 to 1,011 MW in 2023. With an anticipated annual growth rate of about 26% over the next three years, the industry is drawing interest from various investors, including growth-stage private equity firms, pension funds, and sovereign wealth funds.

It also highlights the massive investment opportunity in India’s data centre (DC) market, driven by the expanding use cases among AI customers.

The report also states that hyperscalers in India are increasingly choosing to construct and operate their own data centres based on their specific needs—a major shift from global trends. 

“Hyperscalers” refer to large cloud service providers or firms that operate at a massive scale, often building and managing extensive data centre infrastructures. 

“We believe that India’s DC market will pave the way for the next wave of investments in real estate and AI, unlocking tremendous stakeholder value. Developers can expect to generate 25%+ IRR with a build-and-sell model, highlighting the sector’s potential for superior returns compared to other yielding real asset classes. This will drive demand for DC capacity in India, which is expected to double to 2 GW by 2026,” siad Prateek Jhawar, Managing Director and Head, Infrastructure & Real Assets Investment Banking, Avendus Capital. 

About 94% of the existing data centre capacity in India is concentrated in its seven largest cities. Over the next five years, Mumbai is expected to see about 40% of the total new capacity added. Chennai is projected to contribute roughly 25% of the new capacity, while Delhi is set to add around 15%. Edge data centres are also likely to witness significant demand growth, driven by increasing data generation and consumption in Tier II and III cities.

The study further notes developers building a wide network of data centres are poised to benefit, with prefabricated data centres emerging as an effective solution to meet this growing demand. It further stated that offering enterprise solutions like colocation and managed services is becoming a key strategy for those aiming to achieve more than just development returns.

“We anticipate heightened transaction activity from both public and private markets. Scaled investments with a vintage of over 4 years are expected to seek listing opportunities, while developers will look to raise larger amounts of capital to fund this growth. The industry is maturing with the entry of long-term investors with commitments of over $250 million per investment, offering de-risked returns,” Jhawar said.