In a world where the growing demand for data and access to computer networks drives the demand for physical and virtual space to host the facilities that generate them, a new asset class is emerging in the alternative investments market: data centres.
In the wake of the growing demand for web access that has intensified over the past two years, with the spread of virtual conference call systems highlighting the undersized nature of computer networks compared to potential demand, the investor world is wondering whether this asset class could constitute an investment opportunity with attractive returns in the coming years.
Data centre facilities
Descended from the ‘computer rooms’ of the 1980s, data centres experienced an acceleration in their technological growth between the late 1990s and the 2000s, the years of the dotcom bubble. The need to have a physical place where to place the ever more numerous equipment (the so-called ‘racks‘) that would guarantee continuous and ever faster access to the network, prompted companies to set up their own data centres, often housed in structures and buildings that had been created for completely different purposes, and only later adapted to accommodate the numerous racks, and equipped with the necessary infrastructures for their operation (uninterruptible power supplies, air conditioning systems, access control and fire prevention systems, etc.).
Instead, the trend today is to build structures from scratch that, right from the conception phase, guarantee efficiency in consumption and thus in costs.
Structures are therefore modular, often with a limited ‘building’ component that is above all a container; among the most relevant location factors are certainly the proximity to electricity grids, telecommunications infrastructure and network services, transport lines and also the proximity to emergency services. Environmental risk factors are also taken into account, including the geological zone of location (in anticipation of seismic events), flood risk, proximity to external risk factors, and above all the average climate throughout the year, since a crucial element for the efficiency of a data centre is the cooling capacity of the rooms that house the servers, and the average outdoor temperature is therefore a relevant element.
Compared to a classic building, such as an office building, a hotel or a logistics hall, a critical factor is the rapid functional and technological obsolescence that characterises these IT infrastructure containers: whereas typically a building has always had an obsolescence period of more than twenty years, typically thirty years, today a data centre can be considered obsolete after ten years, and even less so with regard to its internal components.
Investments in data centres
Data centres, often referred to as the ‘factories of tomorrow’ to emphasise their role as data production sites, are, after logistics real estate, the new face of commercial real estate investment and certainly the most modern.
Historically of exclusive interest only to IT companies, owners and developers, real estate investment in data centres is catching the attentions of classic institutional investors active in alternative investments, who are constantly looking for new forms of investment and increasingly attractive returns, especially when compared to the returns of more traditional real estate asset classes. Today, we can undoubtedly state that this market is therefore destined to grow exponentially with the development of big data processing technologies, cloud computing, artificial intelligence and social media.
The most mature market is that of the United States, where data centres were born; looking instead at the EMEA area, which has seen growth at a double-digit rate over the last ten years, the countries interested in the development of this asset class are the United Kingdom, Germany, France and the Netherlands, where the prevalence of companies in the technology and financial sector is located, specifically in the cities of London, Frankfurt, Amsterdam, Paris and Dublin.
In Italy, too, this market is seeing a strong acceleration in investments, which are mainly located in northern Italy and especially in Lombardy.
In the period 2019-2023, the compound annual growth rate (CAGR) of the volume of data centre transactions in Europe was projected to be 10 per cent, starting from a total investment to the end of 2019 of about USD 331 billion; as of today, forecasts for the period 2021-2026 indicate that about USD 581 billion will be invested in data centres by that year, with a CAGR of 8.3 per cent.
Very interesting is the return on investment of this type of real estate investment, which generally hovers around 5-7%, but can reach and exceed more than 10% if the owner also takes care of all technological support to the tenant.
The criteria for investing in data centres
A peculiarity of the analysis of a data centre investment is the real estate unit of measurement used. Whereas until now we have been accustomed to evaluating a real estate investment in terms of rent expressed in currency (dollars or euros) per square metre of floor space per year, Megawatts/month are used for data centres.
From a risk/return profile point of view and compared to traditional real estate asset classes, data centres are definitely considered riskier than other mature types such as office, logistics, hospitality, student housing or senior housing.
Rental fees in Frankfurt, for example, for spaces over 250 kW installed capacity, are in the range of 160 to 200 dollars kW/month, in London between 130 and 170 dollars kW/month, in Paris between 120 and 165 dollars kW/month.
Another component that implies a different approach to investment is the strong functional and technological obsolescence of these container buildings, which can be said to be obsolete after 10 years.
Green data centres
As outlined above, the importance of energy efficiency criteria for data centres is growing over time: these containers are in fact energy-intensive in terms of electricity, which is needed not only to run the servers, but above all to cool them.
The impact of these buildings, and the fallout in ecological terms, is therefore more topical and debated today than ever before, especially in relation to actual long-term sustainability. Green data centres are therefore characterised by a configuration that minimises land consumption, the use of eco-sustainable building materials such as low-emission paints, the design of building elements that are 100% recycled at the end of their life cycle, and the use of alternative energy sources such as photovoltaics, heat pumps and evaporative cooling.
In addition to the sure advantages of offering healthy, comfortable and healthy working environments, this specific class of data centre is certainly suitable for investors who, in their search for attractive returns, do not neglect ESG issues, which in this case can be said to be amply fulfilled.
The size of the green data centre market is expected to grow from USD 49.2 billion in 2020 to USD 140.3 billion by 2026, with a compound annual growth rate (CAGR) of 19.1 per cent.
In particular, the green data centre market is arousing interest in various countries, and has caught the attention of major companies and government institutions, which support the implementation of this type of solution over more traditional and less environmentally friendly models.