Risky Business? Data Centres – A better class for investors?

News | July 15, 2020

3 min read

Risky Business? Data centres – a better class for investors?

A decade ago data centres were an emerging asset class and approached by investors with considerable trepidation. Today, they have passed the COVID-19 resilience test with distinction and these “digital factories” are becoming a magnet for investment funds.

Not even the most proficient of PR practitioners could have imagined a more compelling case for investment in data centres than the showcase supplied by the coronavirus crisis.

The seismic shockwaves of the global pandemic’s “big bang” awoke the masses to the merits of operating in a digital world. From shopping and seminars to the live streaming of conferences, concerts and classes, every activity that could move online during lockdown did so and – in the main – without the crash in productivity prophesied by tech-wary traditionalists.

In turn, the increase and reliance on remote working, coupled with governmental and societal need for robust communications systems, shone a spotlight on the potential dividends on offer to those investors willing to plug into the vital infrastructure that kept us connected, informed and entertained while social distancing.

Virtual may have become en vogue because of the pandemic, but the reality is that data centres did not need the help of COVID-19 to go viral among those hunting for asset diversification and enhanced risk-adjusted returns. Regardless of R-rates, the insatiable demand for big data, cloud computing, artificial intelligence and the Internet of Things was already creating a significant buzz and had not gone unnoticed.

Fuelled by the knowledge that the ability of Amazon’s Alexa to relay recipes in real-time or adjust the ambient lighting of an apartment represents the tip of an innovative iceberg, interest in data centres – the buildings and equipment that maintain technology’s march – has grown exponentially.

In Europe, for example, 2018 and 2019 saw record levels of investment in the sector and last November – prior to Wuhan gaining global notoriety – a Chinese operator claimed to have struck the world’s largest venture capital deal.

Once regarded as something of an outside bet and the preserve of tech mavericks ready to chance huge sums on unknown outcomes, data centres now look increasingly like a bookmaker’s favourite.

The roll-out of 5G and expectation that three quarters of the world’s population will be living and working in intelligent buildings, towns and cities within the next 30 years further suggest these by-products of the dotcom boom of the 1990s are a gift-horse not to be ignored.

In real estate, as in racing, however, there is no such thing as a sure thing and investors should seek to partner with a rider familiar with the hurdles likely to be faced during the lifetime of their investment.

A high demand does not automatically dictate high dividends and knowledge of the “going” is vital to successfully negotiating what remains a highly-technical field. The physical space for such facilities in and around the UK’s cities remains at a premium and the ability to identify viable sites clear of floodplains is a specialism in itself.

Hyperscale data centres – such as the 80MW development we have project managed the design, procurement and construction for in Dagenham, Essex – are also energy-hungry entities, with the density of power for one large data centre comparable to that consumed by half of Canary Wharf. Understanding how to supply this significant requirement with resiliency and introduce environmentally-friendly heat rejection measures is a necessity to attracting and retaining green-minded occupiers.

Historically, part of the allure for investors has been the sticky revenue stream afforded by data centres as a consequence of migration being perceived as a major headache for tenants. However, given the relative speed at which they can be constructed and, in turn, relatively low barrier to entry for competitors, future proofing buildings is a fundamental, if not incredibly complex, cornerstone to delivering an asset equipped to keep stride with advancements in technology.

Although data by its very nature is not dependent on physical geography, delivering a class-leading facility in the right place for high capacity and fast links to the internet is paramount to protecting and rewarding investment. Doing so requires a sound pedigree, exacting due diligence and astute project management and monitoring skills.

When the associated risks are mitigated, backing a data centre can be a fast-track to the winner’s circle but prospective owners would be well-advised to select a champion jockey to steer their prize mount.