Following the previous article from this series; An Introduction to Data Centres, this article will focus on the Data Centres and its relevance to the real estate sector. The following will cover why data centres have seen a massive expansion over the past 20 years, where data centres fit in the real estate industry, whether data centres should be considered as infrastructure investment whilst also covering the main challenges and opportunities of investing in this new and exciting sector.
Between 2015 and 2020 the number of data centres being built across the globe has massively increased. The original growth of data centres took place during the dotcom bubble and the rise of the internet, although more recent demand is related to the increase in home working, the need for offices to have high performing internet access, online shopping, gaming & streaming, higher internet activity (as a result of AI & machine learning), as well as advancements in the 5G network. It is expected that data requirements across the globe will only increase and as we move towards a digital economy, so will the demand for its centres.
So where do data centres fit in the real estate industry? They are certainly not considered as traditional real estate but can be better defined as alternative or emerging real estate. The industry is still new and its valuing metrics as different from that of the traditional real estate markets. For instance, prices are not determined in terms of square footage but rather through capacities measured in kilowatt usage or megawatts, ie on the power that they consume and the data that they store. Some will argue that data centres are not real estate investments, rather a mixture of real estate and infrastructure, or simply infrastructure investments. This is as within data centres lie telecommunications, servers, semiconductors, fibre and data. This is something which infrastructure investor are more familiar with and less so within the real estate sphere. Another stumbling block for real estate investors is the struggle of appreciating the links between owners & operators of the space and the agreements and guarantees between both parties. Traditional real estate tends to be more simple with a straightforward structure of a long term real estate investment and limited involvement within the operations. With data centres, investors are required to have an in-depth knowledge of what is happening inside the centres. There is an argument that in order to invest in the centres, investors require more knowledge of data centres than they do so of the real estate that houses them.
With traditional real estate, such as offices, residential and logistics, investors merely need to buy land in the right location and can expect their tenants to handle the inside of the space and pay the rent (although over the past few years landlords are now expected to take a more hands-on approach). This trend appears to be accelerating across the board within the real estate sector. If investors lack knowledge of data centres and refuse to take a more hands-on approach (or hiring a 3rd party professional), they run the risk of purchasing a promising asset, but with the wrong infrastructure in place thus not attracting any suitable tenants. The evidence is clear that in order to invest in data centres, a lot of due diligence is required, more so than the traditional real estate sectors especially considering it is such a new and developing industry. Additional challenges include limited data and transparency. Several transactions are not documented whilst there too few transactions to gather historical evidence to determine trends. The centres are also very susceptible to technology becoming outdated.
Nonetheless, for those willing to take on the challenge, the industry is growing and has the potential to bring in rewarding and stable return to its investors. Data usage across the globe is increasing and so is its demand as more companies require data whilst the usage of data by consumers is only increasing. One of the key benefits for landowners is that they will secure long term cash flows as their tenants are likely to sign long term leases due to the high upfront costs associated and are unlikely to relocate as once IT infrastructures are set up, businesses will be less inclined to relocate. Currently, there are only a few key players in the market, so for those willing to enter, it will take time for the operators to build their trust, and will need to act aggressively in order to gain a stack in the market (or build their portfolio one step at a time and build their relationships as they go along). If an investor is willing to enter the market of data centres, it is proving to be a risky, challenging and ever-evolving sector. Nonetheless, demand is rising, so by offering the right product, investors can expect a long term and stable income streams.
The following article and the last of this series will focus on the UK Data Centres Market 2020 and beyond.