The need to build facilities to store data is increasing exponentially, making this one of the most dynamic sectors in the industry but also one with an extraordinarily high entry level. So where are the opportunities and how are firms investing in them?
The world’s global datasphere will grow to 175 zettabytes by 2025.If, like me, you thought that a zettabyte sounds more like a breed of exotic animal rather than a unit of measuring data, then here is an example from market intelligence firm IDC to put this into perspective. If you were to store 175 zettabytes on DVDs, you could have a stack that would circle the earth 222 times.
Obviously, we have a better way of storing this overwhelming mass of information – which is where data centres come in. Investment into data centres started 25 years ago during the dotcom boom. At this point they were viewed as niche and esoteric technology, built by private equity investors and telecommunications businesses. But that all changed in 2007.
Steve Jobs shook the world with the launch of the iPhone, and around the same time, tech giants such as Amazon, Google, Microsoft and others launched cloud services, meaning that software and services can be accessed over the internet. Businesses started to replace their in-house data centres with these cheaper, scalable and more efficient cloud service solutions that these technology providers were offering.
This led to an exponential rise in technology giants building their own cloud data centres all over the world. These buildings can be vast, sprawling over millions of square feet. One of the largest in the world, the Range International Data Centre in Langfang China, covers the same amount of space as the Pentagon at 6.3m sq ft. Some savvy local authorities and governments – including Washington DC, Oregon, Ireland, Sweden and the Netherlands – spotted the opportunity, offering tax breaks for tech companies looking to build cloud data centres to attract investment into their local area.
Investment is only set to grow even further. According to research conducted by DLA Piper, data centre investment reached an all-time high in 2018, with deals exceeding €1.2bn. Furthermore, 2019 was on track to smash this record, with €924m piled into data centres in Q1-Q3 alone.
Of the 50 senior executives from banks and financial institutions who have provided debt for data centres and companies pumping equity into these schemes, there are no signs of a declining investor appetite. Nearly all of respondents (92%) said they expect investment into these assets to increase over the next 24 months, and to exceed levels of investment in previous years.
With an investment boom ahead for data centres, where are the opportunities, and how exactly are firms investing?
Who is investing?
Alongside the tech giants building out their own data centres, there is a number of key players in the data centre investment space.
Infrastructure funds in particular are eyeing data centre investments with a beady eye, according to DLA Piper partner Anthony Day. And a selection of financial institutions, including Deutsche Bank and Lloyds Bank, have emerged as the “go-to” debt providers for data centres, with Japanese banks looking to enter this debt provision space as well.
Debt providers have started to “package up receivables”, Day says, and lend against the money coming through from tenant contracts. This is because these contracts are seen as “sticky” – essentially, tenants won’t want to be moving out of a data centre in a hurry owing to the immense logistical challenge of moving and setting up a new network infrastructure.
Cloud service providers are building out their own data centres, but their growth strategy is so aggressive that they can’t build all their data centres by themselves. They need a partner to help them with that deployment
– Michael Winterson, Equinix Services
CBRE data centres Asia Pacific executive director Tom Duncan says that the sector has “matured rapidly” over the last 24 months. While most equity sectors – from private equity and venture capitalist funds to the institutions that Day notes – are all investing in data centres, “more traditional real estate investors are becoming a lot more comfortable” with the asset class too, Duncan adds.
But while investors may secure long-term income streams through data centres, the assets come with a price tag.
To build a new data centre requires deep pockets, such as Google’s, for example. The tech giant announced in September last year that it would be pumping €3bn into data centres across Europe, bringing its total investment in these assets in Europe to an eyewatering €15bn since 2007.
It is why we are beginning to see investors forming joint ventures to share the capital burden, Day says. For example, Legal & General partnered with Goldacre Noé Group last February and took a 50% stake in the Kao Data Campus development in the London-Cambridge corridor.
“The investment is pretty hefty if it’s a new data centre build,” Day says, estimating that it costs around £200m to build a new data centre, and even more if it is state of the art. “It’s a fairly significant capital outlay.”
Where are the hotspots?
In terms of data centre hotspots, location is key, Day says. Capital cities or metropolitan areas across the Netherlands, Germany, France, and to a certain extent, the UK, are key areas for investment, according to Day.
“These are areas which are good for a demand perspective – there are fairly decent demands… in these locations,” he says.
Duncan argues that the rise in the Internet of Things and 5G will trigger investment in new regions around the world – especially in the APAC region which is “relatively underserved in terms of data centre supply, and lags behind the US and Western Europe in terms of internet penetration and mobile phone adoption”.
Although the APAC market is currently the smallest, it is also growing the fastest, and presents investors with an opportunity to tap into a growing sector, Duncan adds.
Meanwhile, Equinix, one of the biggest data centre providers in the world, has spotted opportunities to push into new markets in Korea, Oman, Mexico and Hamburg, according to managing director of Equinix Services, Michael Winterson.
One of Equinix’s core markets, however, is Europe, where demand is insatiable. The investor has joined forces with Singapore sovereign wealth fund GIC, forming an investment vehicle to pump €1bn into building six data centres across the area, because demand for these assets is so high.
“Cloud service providers are building out their own data centres, but their growth strategy is so aggressive that they can’t build all their data centres by themselves,” he says. “They need a partner to help them with that deployment. So we’ve created this joint venture to help those large core providers deploy those future services.”
Keeping data sustainable
Nordic areas are also popular regions to set up data centres, Day says, because investors can create more sustainable data centres. As a result of temperate climates in the region, less energy is used in cooling the infrastructure, which drives down costs. It is also easier to access to renewable energy sources to power these assets. “Data centres burn loads of power, and it’s one of the most expensive operating costs for data centres,” he says. “Picking a site or a location that means that you don’t need to use as much power [for] cooling, or you can leverage better renewable energy at a cost-effective rate, is attractive.”
Power consumption of these assets is big. But as property comes under increasing pressure to reduce its carbon emissions (according to UN estimates, the sector accounts for 30% of all global carbon emissions), could the sector have a battle on its hands?
Winterson thinks not. When businesses choose to digitise a physical process – for example, replacing CDs for Spotify – you cut the energy used in making a physical product by “numbers as high as 20:1”, according to Winterson. Digitising physical products or services also removes the need for transportation, again radically cutting down carbon emissions.
“Yes, we consume a lot of electricity, and yes we consume it in cities which are typically tight on electricity,” he says. “But when you look at the big picture, the savings involved in using these services versus not, is immense. If I did not believe this, I would not work with this company. I fundamentally believe that a key solution to sustainability is the rapid digitisation of business.”
For Winterson, data centres truly are the key to the future. And with sky-high demand, we will only see investment continue, especially as more investors look to form joint ventures. The question is: who will we see join forces to pump cash into this space next?
Mega structures: three of the world’s biggest data centres
Kolos Data Centre, Norway
Size: 6.5m sq ft
The largest data centre in Europe is also the largest in the world to be 100% powered by renewable energy sources taking advantage of Norway’s hydroelectric infrastructure.
China Telecom Data Centre, China
Size: 10.7m sq ft
Located in the Inner Mongolia Information Park this is the largest data centre in the world spanning 10.7m sq ft. It is also the most expensive data centre in the world, the facility is reported to have cost over $3bn to complete. At an altitude of 1050 metres, the average temperature is 6°C (42.8°F) meaning this centre can offer “free air cooling for up to eight months a year”.
The Citadel, US
Size: 7.2m sq ft
The Citadel, still awaiting completion, lies near Reno in the North of Nevada. The facility covers 7.2m sq ft and, when fully operational, will consume 650 megawatts of power.
From the archive: Inside the datacentre
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