Data Centre Developers Waiting For Next Generation Of Buyers To Emerge

Billions of dollars have flowed into data centre development in the UK and Europe in the last few years. Now, developers are seeking buyers for stabilised assets so they can sell up and redeploy capital into building even more. 

“We’ve got a lot of investor interest in buying stabilised assets, looking for a certain yield on an annual basis, something that spits off cash,” DigitalBridge principal Zachary Stephenson told the audience at Bisnow’s UK Data Centre Investment Conference and Expo.

“These assets are potentially just better held in someone else's hands in terms of a capital efficiency perspective.”

Keeping properties moving benefits real estate investors, offering access to assets with long leases and good covenants in a sector where there is strong demand. For developers and operators like DigitalBridge, it is an opportunity to reinvest money into development.

Global data centre investment volumes grew 118% to £24.5B in 2024, data from Knight Frank showed, with corporate M&A activity accounting for another £32B of capital invested in the sector.

But the majority of that capital went into development of new schemes rather than the trading of existing assets. And although there is strong interest from investors to front capital to build data centres and meet demand from both smaller users and large tech companies like Amazon and Microsoft, that capital is not limitless.

Other real estate sectors sell finished projects to free up balance sheets. The ability of developers to do just that will eventually be needed for data centres, too. 

“The reality is that some of these data center development businesses have capex burdens based on the contract they signed that are multiple billions of dollars or euros,” AustralianSuper Senior Investment Director James Walsh said. 

“If you assume a rough rule of thumb that 60% to 70% of any bill will be financed by debt, then you've still got a very large amount of equity that needs to go into these businesses to build out the development pipelines. The balance sheets of DigitalBridge or AustralianSuper are very large, but they have their limits.”

AustralianSuper bought a minority stake in the European platform of data centre operator Vantage Data Centers for €1.5B (£1.3B) in September 2023. U.S.-listed DigitalBridge is also an investor in Vantage, and Stephenson said that although data on the topic is hard to come by, the company estimates that it is the largest owner of data centres in the world. 

Walsh envisages a future where data centre developers and operators build and lease up new schemes, then create funds or platforms allowing new investors with a lower cost of funds to put in money as a way of recycling capital. It is a formula that has been used by Prologis in the logistics sector and Unite in the UK student accommodation sector, for example. 

Stephenson said debt markets would play a part in this process as well.

In April 2024, Vantage secured £600M of CMBS debt against two Welsh data centres valued at £1.1B in Europe's inaugural data centre securitisation. The £600M CMBS is secured against two Welsh data centres called CWL 11 and CWL 13. They account for 112 megawatts of power to data centre tenants.

Stephenson said that investors buying the CMBS bonds provided a pool of potential investors in other data centre debt and equity deals. 

Helaba’s Richard Revess said that from his perspective as a lender, the bank is happy to lend against data centre development or stabilised assets. When it comes to development finance, however, it wants to ensure facilities are of a size and loan-to-value ratio that mean easy refinancing at the end of the construction process. 

Panellists said they expect long-term demand in the sector to be strong despite a potential short-term slowdown from large tech companies. 

“I think data centre demand, especially from the hyperscalers, is a high-growth market,” Walsh said. “And any high-growth market is not a straight line. So while it has been well documented that there are some pullbacks from at least one of the customers, we're very confident that that is temporary, more likely months than years.”