Data centres remain one of the fastest growing real estate segments as the Covid pandemic has accelerated favourable secular trends, but developers and investors looking for high yields and promising stable cash flows face specific risks.
Scope Ratings says managing the risks, particularly those related to energy and the environment, has become particularly challenging today.
“Strong demand from users and investors, underpinned by still easy financing conditions, now coincides with rising energy costs, to which data centres are particularly exposed, and growing scrutiny of the segment’s environmental impact,” says Rigel Patricia Scheller, analyst at Scope.
Data centres have become one of the top 10 real-estate sub-sectors to invest in, and ranked first among alternative segments such as life sciences and communications towers, according to PWC’s 2021 Emerging Trends in Real Estate Europe survey.
“As data centres emerge as a more mature, standalone real estate asset class, investors need to pay attention to how different the segment is from the conventional commercial and industrial real estate assets they are familiar with,” Scheller says.
Data facilities house specialist, high-tech equipment and require expertise to build and maintain them, none of which has much to do with traditional real estate segments. Investors need to take sector-specific factors into account: relatively high construction costs, proximity to data and power grids, climate risks and the related issues of environmental impact and energy costs.
“Accelerating digitalisation is driving rapid growth in corporate demand for data centres, hence soaring aggregate energy consumption given the electricity required to run modern computer servers and prevent them overheating,” says Scheller.
Data centres consume 10 to 50 times the energy per floor space compared with a typical commercial office building.
Increasing energy prices and price fluctuations have less of an impact on larger operators with diversified businesses and deep pockets than smaller players. Large operators and so-called hyperscalers – companies like Alphabet Inc.’s Google, Meta Platform Inc.’s Facebook, and Amazon.com – are major investors in renewable energies, partly protecting themselves from volatile power prices and helping with their environmental image.
What is not in doubt is the strong growing demand for facilities to store and manage digital information. The International Data Corporation (IDC) forecasts data consumption will grow at a five-year compound annual rate of 26% through 2024.
This trend has attracted a wide variety of investors, including real estate investment trusts such as Colony Capital which recently rebranded at DigitalBridge Inc., with USD 30bn under management focused on digital infrastructure. Investment managers, institutional investors, sovereign wealth funds such as Singapore’s Government Investment Corp. and Denmark’s PFA Holding, private equity firms and specialist funds have also invested.
Yields are attractive compared with other asset types. They range from 5% to 7%, according to Savills, depending on the quality of the asset and location, representing an average of around 1.5pp premium over other segments.
“Yields are likely to fall in the next year or two as the market matures amid such heavy investor demand,” says Scheller.