Investors Find New Ways To Tap Exponential Demand For Data Centres
The data centre market in London and the UK is a bit of a paradox at the moment.
The demand for data centre space continues to rise dramatically. In 2018, take-up of data centre space in London was 77 megawatts, an annual record for a European city, according to CBRE. It is not hard to guess why. Between e-commerce, streaming services, social media and business, we live our lives online today, and the cloud-computing systems that power these services need ever-more physical space to store and process data.
However, it is a market that few traditional real estate investors have cracked, and it remains dominated by specialist investors like Global Switch or Digital Realty Trust, or by occupiers owning their own centres. It has all the characteristics real estate investors should love: high occupier demand and long leases. But a lack of stock holds the sector back.
As the sector matures, there are innovative ways real estate owners can tap into a market where demand continues to outstrip supply.
“More and more of our daily lives is moving online, and in that sense data centres are a social infrastructure asset,” Evans Randall Director James Edwards said. “Tenants tend to sign long leases because the amount they invest in the space makes it financially sensible to stay in one location. That makes them defensive assets. But there is just so little stock, and very little investment, that makes it a very difficult market to enter.”
There was just €1.4B (£1.2B) of investment activity across the European data centre market in 2017 and 2018 combined, according to Real Capital Analytics. Savills predicts that will rise at a compounded annual growth rate of 10% a year between now and 2023, but that still means pan-European volumes of just €1B a year, a tiny fraction of the overall market.
Because data centre operators invest so much in the technology within centres and the power required to run them, it often makes sense for them to be owner-occupiers, Edwards said. And the business case for building them can be hard for most common-or-garden property companies: Getting planning for centres is complex, and so centres can take five years or more to build, meaning capital can be tied up for a long time.
Evans Randall bought two data centres in 2012 and 2013, one in London and one in Amsterdam, drawn in by yields of 7.5% despite long leases and the high demand from occupiers. There were plans to use the assets as the cornerstone of a data centre REIT or fund, but stock was simply not available, so the assets were sold, in one case to an operator.
However, while it can be tough, data centres are not a complete no-go area for real estate investors, particularly if they are willing to take a long-term strategy.
In the UK, Legal & General Capital in February invested in the £230M Kao Data Campus located between London and Cambridge. The 35 MW campus was developed by Goldacre, part of the private property company backed by the Noé family, which stabilised the business and then brought in L&G as a long-term investor.
And last year, AXA Investment Managers - Real Assets bought the 63% of European data centre company DAT4 that it did not already own. The company owns 15 data centres across Europe.
There are increasingly new ways to invest in data centres beyond buying or building the huge facilities typically associated with the sector.
Agency firm Cluttons is advising one fibre optic company on a rollout of point of presence data centres across the UK. These are essentially mini data centres, often contained in prefabricated units, and located in areas of high-density internet usage as they can speed up internet connections in a given area.
“Everyone knows that the UK’s digital infrastructure needs to be upgraded,” Cluttons Head of Real Estate Management John Gravett said. Gravett will speak at Bisnow's London Data Centre Investment Conference 7 November.
“There is a growth in demand for data, and this is a way of satisfying that demand, a plug-and-play solution. People just think about the big data centres, but this is where the market is going.”
Cluttons is advising on a rollout of about 25 POPs across the UK. These facilities are often located within other types of property, such as industrial estates or car parks.
“A lot of other kinds of tenants [are] leaving the marketplace, and this is a new potential revenue stream and a new kind of occupier coming in.”
No one is predicting that the demand for data and the need for space in the cloud is going to go down any time soon — even if you have been living in a cave for the past few years, that cave probably has WiFi. Innovative investors will find ways to tap into this demand.