In recent years, the investment flow into the real estate’s alternative asset class has highlighted Data centers and co-living as the favored choices for global institutional investors. According to Colliers India’s latest report, alternative assets in India received cumulative investments of about USD2.0Bn during the last 4-5 years (2019-H1 2023), led by foreign investors. Foreign investments accounted for 78% of the total investments in the segment, as investors continued to seek newer markets and newer avenues segments to diversify their asset portfolio while enhancing risk adjusted returns.

Institutional investors, traditionally concentrated on core asset classes, have been diversifying into non-core assets such as Data centers, Life sciences, Co-living, among others. Foreign investors maintain their confidence in the Indian real estate market, given India’s status as one of the fastest-growing economies globally, with a projected GDP growth of 6.6% in 2023, according to the IMF. At a time when India’s economic outlook remains sturdy amidst global challenges, the business case for alternative investments will only strengthen.

“As conventional asset classes like Office, Residential, Hospitality and Retail are evolved with significant investor and operator penetration, the alternatives are now poised for exponential growth over next few years. Alternate asset industry which revolves around enhanced customer experiences, flexibility in Office, Residential, Technology usage and data storages is likely to provide significant partnership opportunities to investors and operators. While core sectors continue to dominate the institutional inflows in Indian real estate sector, share of alternatives has risen significantly from 3% in 2019, to 18% during 2022,” said Piyush Gupta, Managing Director, Capital Markets & Investment Services.

Also Read: Retirement Planning: How to avoid retirement funds falling short of expectations

Data centers take the lead in alternative investment inflows

According to Colliers, since 2019, data centers have received USD1Bn of institutional inflows, with inflows rising multi-fold in the last 5 years. During the period under review (2019- H1 2023), data centers accounted for about 51% share in the total investments in alternatives.

Strong growth in data consumption has catapulted the growth and development of data centers in India in the last five years. Investors are enthused by burgeoning demand and attractive returns of the data centers and have been actively infusing funds over the last 2-3 years. Data centers in India have given promising returns at about 16-18%, much higher than 8-9% in core office assets, which have further accelerated investors’ interest in the space.

As data centers are capital intensive and entail greater technical know-how, investors are increasingly partnering with data center operators, who are ramping up expansions in the country. Global hyperscalers too are viewing India as a prime market for expansion to capitalize on the increasing demand from cloud usage. 2023 has seen some landmark investments and pre-commitments from global hyperscalers in India’s data center space, as they are looking to set up their own facilities to suit their requirements. Data centers are also witnessing large platform deals between developers and investors who are looking to grow their businesses multi fold. During May 2023, Lumina CloudInfra, a data center platform owned and managed by Blackstone’s Real Estate and Tactical Opportunities Funds, announced its plan to invest more than USD300 million to develop a hyperscale data center campus in Navi Mumbai. Similarly, Reliance Industries partnered with Brookfield Infrastructure and Digital Realty for developing data centers in select locations in India.

Emerging entrants are also venturing into the market, capitalizing on the potential. Anant Raj Ltd recently operationalised a 3MW data center at Manesar facility and the next phase is on advance stage of operationalization. The company is committed to developing a total of 300MW of Data centers across Manesar, Rai, and Panchkula with an investment exceeding Rs 10,000 crore and will unfold over the next 4-5 years.

Amit Sarin, Managing Director, Anant Raj Ltd, said, “India’s Data Center market is experiencing rapid growth, fuelled by a remarkable surge in virtualization, E-Commerce, cloud computing, and the prolific generation of public data. As the world’s second-fastest-growing digital economy, India is set to witness the IT & Communication sector’s doubling by 2025, contributing approximately USD$ 400 billion to the Indian GDP.”

Global investors have specifically favoured data centers over the last 5 years, accounting for over 90% of the total investments in the sector during the period. Foreign investments have helped data center operators to achieve the desired scale, foray into new markets and achieve development and operational expertise by providing access to capital.

“Global investors are increasingly allocating funds towards alternative assets, with their share in total investments rising from 55% in 2019, to 75% in 2022. While data centers continue to dominate investments in alternatives, there is an increased opportunity in sectors such as Co-living, with more organized players looking to enter the space. Rising demand coupled with strong growth fundamentals for Co-living sector remain highly supportive of required investments over the long-term. As the market grows towards maturity, the sector will likely witness allocation of more foreign capital, enabling investors to enter new markets and benefit through economies of scale, fostering institutional investments in the sector,” said Vimal Nadar, Senior Director and Head of Research, Colliers India.

Co-Living on the rise

In addition to the thriving Data Centre segment, other alternative asset classes like Co-living have also been gaining notable traction in recent times. Co-living, in particular, has garnered significant attention from investors due to the escalating demand for such accommodations.

Abhishek Tripathi, co-founder, Settl, said, “We are currently witnessing a substantial demand, particularly from professionals, who are willing to pay a premium for well-managed co-living spaces. Most of our properties reach full occupancy within days of their launch. Over the past three years, we have successfully launched more than 3,000 beds across various cities.”

This growing interest in co-living spaces reflects a broader trend in the real estate market, where professionals and individuals are increasingly seeking premium and well-managed living arrangements that offer more than just conventional housing options. This shift in demand not only makes co-living an appealing choice for tenants but also presents a lucrative investment opportunity for those looking to diversify their portfolios within the real estate sector.

Sunny Garg, Co-Founder & CEO, Crib, a SaaS-based property management solution, said, “The co-living sector in India has experienced substantial expansion, particularly in the wake of the COVID-19 pandemic. While co-living undoubtedly provides an attractive living arrangement for tenants, it also presents a lucrative opportunity for investors. With proficient property management and well-maintained amenities, investing in co-living can yield consistent rental income. Moreover, co-living often offers higher rental returns compared to traditional rental arrangements, making it an enticing prospect for institutional investors seeking both stability and profitability.”

The increasing demand for co-living accommodations is extending its presence beyond major metropolitan areas and into Tier II cities. This shift signifies a noteworthy trend in the real estate market, where the popularity of co-living is transcending urban boundaries. “Notably, this demand extends beyond metro cities and is emerging in tier II cities as well. To meet this growing demand, we have strategic plans to expand our facilities into tier II cities like Ahmedabad,” said Tripathi.

Settl. is currently in the final stages of concluding its pre-series A investment round and have received significant interest and responses from investors. “Both domestic and international investors are displaying high confidence in the sector’s growth and are eager to invest,” added Tripathi.