Lease Structure Key To Liquidity As Investors Maintain Data Centre Appetite

Considering exit strategies from the start and getting lease structures in place to attract core and hybrid capital are all essential as the global data centre market matures.

While power has become a hugely important element in development strategies, understanding how the investment market is evolving is just as crucial for companies seeking to invest in a sector where individual assets are getting bigger and more expensive.

“These are capital-intensive businesses, and it's pushed us to think outside the box as to how we finance these businesses and how we continue to sustain the growth we want to achieve,” DigitalBridge principal Pascale Labrecque told an audience of more than 300 at Bisnow’s Data Centres Europe Conference. 

“We have to create some diversification and find the right lenders for the right type of investments.”

Labrecque said hyperscaler leases are typically structured as very long-term contracts with escalators, the latter providing ongoing protection for investors, enabling long-term financing to be put in place.

“If you want development risk, I think infrastructure investors are more comfortable, but some actually want yielding assets, and that allows you to tap into these more long-term vehicles of investment, as well as real estate investors,” Labrecque said.

“The challenge we have is, we're spending quite some time to build new structures, and we learn from our mistakes, and we also get better as we try to listen to our investors. So how can we make this a more real estate-like investment pool?” she asked.

Reflecting that evolution in approaches, industrial and logistics REIT Segro has also developed and diversified its approach to data centres.

In March, it announced a £1B joint venture with Pure DC to build its first fully fitted data centre at Park Royal in London, a much bigger investment than it has previously undertaken in the sector.

“We are a long-term investor, but also we're not a stamp collector. We do actively recycle our assets as well,” said Andrew Pilsworth, Segro managing director, data centres and strategic partnerships. “So, it is really important for us to have a liquid and active market in stabilised assets as well.” 

Looking at Segro’s locations, Pilsworth said that if a site met demand, planning and power requirements, then the task became to find the right way to develop out and add value to that portfolio. 

“In the more established Tier 1 markets, we're more likely to have options as to how we deploy capital and our value, but we're more likely to go for the higher-intensity, -reward and -risk ways of deploying that capital in those higher-quality markets,” he said.

On the question of prime versus secondary locations, DigitalBridge still favoured Europe's Tier 1 markets, Labrecque said. 

“Power can be attractive in terms of the next place we're looking at, and it's true, Zaragoza, Madrid, Milan or the Nordics are all places that we are actively looking into growing our portfolios,” she said.

“The difference I would make, though, is that if you tell me I want to build 2 gigawatts in Wisconsin or Norway, for us, this is a different type of risk than if you're building in Madrid or if you're building in London. I do think, to some extent, latency still matters for us and location still matters.”