AI-led demand for data centres may add 500 MW of capacity in 4 years, projects report

AI-led demand for Data Centres expected to add 500 MW of capacity over the next 4 years: report

The Indian data centres industry is in the middle of a massive disruption led by spiralling demand and use cases by AI customers, with AI-driven demand expected to add 500 megawatts (MW) of capacity over the next four years, according to a report by investment bank Avendus Capital.

The report noted that with AI workloads set to surge and eventually outpace traditional cloud computing, the demand for data centres is also expected to rise sharply. In a major deviation from global trends, hyperscalers in India are opting to build and own data centres tailored to their specifications, the report said, adding that this preference is bolstered by India’s long-term growth potential and regulatory guidance for data sovereignty.

According to the Avendus report, the sector doubled from approximately 540 MW in 2019 to around 1,011 MW in 2023, making India one of the fastest-growing data centre markets globally.

Expected to average a CAGR of 26 percent over the next three years, the sector is attracting considerable attention from a wide range of investors, from growth-stage private equity investors to long-term pension and sovereign wealth funds, it added.

“We believe that India’s data centre 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-percent-plus 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 data centre capacity in India, which is expected to double to 2 GW by 2026,” said Prateek Jhawar, managing director and head of infrastructure and real assets investment banking at Avendus Capital.

As per the report, approximately 94 percent of the current installed data centre capacity is concentrated in India’s top seven cities. Over the next five years, around 40 percent of the total additional capacity is projected to be added in Mumbai, underscoring the city’s significance in this space. Chennai is expected to contribute about 25 percent of the new capacity, while Delhi will account for around 15 percent. Edge data centres (smaller facilities located close to the populations they serve) are anticipated to experience substantial demand due to rising data generation and consumption in Tier 2 and Tier 3 cities, the report noted.

“We anticipate heightened transaction activity from both public and private markets. Scaled investments with a vintage of over four 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 added.