Private equity investments in real estate back in play amid more focus on data centres, logistics

Data localisation, as well as as investments in generative AI, are driving private equity investments in data centres

Private equity funds and marquee global investors are making a beeline for the real estate market — largely in the commercial space — after a lull of around two years owing to global macroeconomic uncertainties.

Investors and market observers say office spaces are an attractive proposition for investors. Significant capital is expected to be directed to alternative assets such as data centres, warehouses and industrial parks, and purpose-built accommodation, including hotels, for students and senior citizens, and hospitals.

For the first half of the ongoing year, private equity deals for real estate were worth around $3 billion, according to data from Knight Frank, of which around $1.5 billion was invested by Kohlberg Kravis Roberts & Co. (KKR) and the Abu Dhabi Investment Authority (ADIA) into Reliance Retail Ventures' warehousing assets.

Rosy outlook for Asia-Pacific, including India

In a recent interaction with Moneycontrol, Pamela Ambler, property consultancy JLL's head of capital markets research for Asia-Pacific, said the second half of this year is expected to be better than the first as far as overseas investments for the region, including India, are concerned.

However, more stability is expected by the middle of next year.

“In Asia-Pacific, there were investments of $57.5 billion in real estate for the first half of this year, and we expect the second half to be better than that. There has been rental growth in some markets because technology has been a fluctuating sector. There is more investor interest in segments like data centres, warehouses, life sciences, and the living segment such as students, senior citizens, and others," Ambler said. She added that signals about looser monetary policy from regions such as the United States (US) is encouraging for investors.

Global ease in flow of capital

After a period of tight monetary policy globally due to the shocks of geopolitical events such as the Russian invasion of Ukraine in February 2022, as well as upheavals in the technology sector and financial institutions linked to it, central banks across the world have signalled their intentions to ease flow of capital.

The Bank of England announced a 25 basis point (bps) cut to its bank rate to 5 per cent. while the US Federal Reserve is expected by most analysts to cut its benchmark rates in the range of 25 to 50 bps.

Ambler said long-term investors continue to see commercial real estate as an attractive asset class, owing to stable returns, a quality sought by instruments such as pension funds.

Commercial real estate boom
Recent deal activity, or announcements for the same, points to more investor interest in assets such as warehouses and logistics, as well as data centres, amid India making a larger play towards manufacturing and shipping, as well as data localisation. Industrial parks, with “plug-and-play” infrastructure, are sought after by sectors such as electronics, including those in the "sunshine" semiconductor space.

In warehouses and logistics, private equity giant Blackstone-backed Horizon Industrial Parks recently committed more than Rs 700 crore towards revamping and operating various warehouses owned by the Central Warehousing Corporation. The global infrastructure investor Actis has formed a joint venture with listed developer Mahindra Lifespace Developers Ltd, which will develop industrial and logistics firms across the country, starting with a Rs 800 crore investment for a facility in Chennai.

In a recent interaction with Moneycontrol, Amit Sinha, managing director (MD) of Mahindra Lifespace Developers, said like the Chennai deal, the company is in discussions with global investors for its planned industrial park in Bhor — located on the outskirts of Pune —  under the brand Origins by Mahindra.

Greenbase Industrial and Logistics Parks, backed by billionaire realtor Niranjan Hiranandani and Blackstone, has also announced an expansion of its industrial parks business. More than 200 acres of land are being acquired to set up industrial parks, with an investment of around Rs 700 crore. The company has planned an investment of Rs 4,500 crore over five years to set up tailor-made warehousing facilities across various cities.

For data centres, "hyperscalers" such as Amazon Web Services, Google Cloud, and Microsoft Azure have set up, or in the process of setting up, data centres of various load capacities across major cities, especially in Mumbai. Pure-play real estate developers, too, have seized on the demand for data centres from various sectors, as investments have grown in generative artificial intelligence (AI).

Boost to ‘plug and play’ infrastructure

Most pure-play real estate firms are approaching data centres from the build-and-sell approach, observers said, where the data centre can be quickly turned over to established data centre players, including to private equity and sovereign wealth fund-backed firms. Data centre traffic to India may also be expected due to some countries expressing concern about the large amounts of land and power that data centres consume. Singapore has lifted a five-year moratorium on the setting up of data centres.

According to a report from Avendus Capital, India's data centre capacity is expected to grow to 2 giga watts (GW) by 2026, from the current 1,011 mega watt (MW), with high rates of return for developers.

"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 per cent-plus IRR [internal rate of return] 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," said Prateek Jhawar, Avendus Capital's managing director and the head of real estate and infrastructure investment banking.

Temasek-backed real estate investment firm CapitaLand Investment has indicated that a significant portion of its plan to double its Rs 46,000 crore-funds under management in India will be through assets such as data centres and industrial and warehousing assets. In the near term, CapitaLand Investment said that data centres may receive more capital allocation in the near term.

The firm has four data centres under development in India, in Navi Mumbai, Hyderabad, Chennai, and Bengaluru. The Navi Mumbai and Hyderabad facilities expected to be operational by the middle of next year.

According to Sanjeev Dasgupta, CapitaLand Investment's chief executive officer (CEO) for India, the four data centres under development may require a capital expenditure of up to 1.5 billion Singapore dollars (around Rs 10,000 crore). The investment firm is also in talks to set up a data centre in Kolkata to take advantage of upcoming cable landing stations in the eastern Indian state.