By Francesc Serras and Gurjit Singh
As organizations around the world scramble to help slow the spread of the virus, some companies find themselves faced with increased responsibility in many other areas of business. Data centers, in particular, have a crucial role to fill.
In the public markets, industry leader Equinix (EQIX) is up 16% for the year, Digital Realty Trust (DLR) has gained 15% (following its merger with InterXion) and QTS Realty Trust (QTS) is ahead 18%. Keppel Data Center REIT is up 13% for the year. These returns all beat the 5% gain in the S&P 500 Information Technology Sector as at May 22, 2020.
Evidence is emerging for the growing appeal of the global data centers:
- Nvidia’s data center business was up a full 80% to $1.14bn, representing 37% of the firm’s 2020 Q1 overall revenues. This was the first time that the sales of kit including data center chips surpassed the $1bn mark in a single quarter in the history of the firm.
- The firm attributes such growth to the surge in those confined to their homes, either because they have been furloughed, or because they have press ganged into working remotely.
- Nvidia CEO Jensen Huang stated that the demand for graphic processing units from data center clients as “the strongest we’ve ever seen”.
- Looking forward, Huang mentioned “I think that accelerated cloud computing is a movement that is going to be a multi-year, if not, a decade long-transition”, and “From where we are today, it’s only a $100bn segment of the IT industry. It’s going to be a $1 trillion someday.”
- DATA4, owned by AXA IM – Real Assets, announced in May 2020 that it has secured a major capital raising of €650 million in order to accelerate the data center’s provider international growth strategy which entails the opening of 23 new data centers on top of the 19 data centers operated in France, Luxembourg, Italy and Spain.
- This will allow the company to double its revenues by 2024 through an acceleration of its development in existing markets and internationally.
- The company is actively pursuing new acquisition targets, particularly in Germany, Central Europe and Scandinavia.
- At the virtual 2020 Urban Land Institute Singapore (ULI SG) Annual Conference, Keppel Capital CEO Christina Tan said that the pandemic will have further accelerated investment in data centers, logistics, and healthcare since demand for cloud services has soared.
- “The digital transformation we had expected to take years has now been further accelerated and compressed within a matter of weeks and days.”
- Keppel Capital currently manages Keppel DC REIT, the first pure-play data center REIT listed in Asia on the Singapore Exchange.
- Keppel DC REIT has $1.4bn of AUM distributed in 15 data centers across 8 countries, including Singapore, Malaysia, Australia, and 5 countries in Europe
- Microsoft CEO Satya Nadella wrote on Twitter on May 5, 2020 the intention to invest in New Zealand to become a new data center region for its Azure platform, fueling the usage of Office 365 and the Dynamics 365 back-office products.
- When New Zealand comes on board, the company will boast 60 regions covering 140 countries around the world
- US$1+ billion transaction announced in April 2020 between GIC, Singapore’s sovereign wealth fund, and Equinix, the global data center landlord, to acquire and develop, as part of a 80:20 joint venture, three hyperscale data centers in Japan
- US$1 billion transaction between Lendlease and an unnamed institution to invest in data centers across Asia Pacific region was announced in June 2019.
- After more than 20 years in the data center space, Australian property group Lendlease stated “This partnership leverages our integrated platform and tenant relationships with MNCs, telco players, internet service providers and our extensive experience and expertise in data infrastructure projects, where we have project managed, designed and built data centers around the world.”
- US$1+ billion transaction announced in July 2019 between GIC, Singapore’s sovereign wealth fund, and Equinix, the global data center landlord, to acquire and develop, as part of an 80:20 joint venture, six hyperscale data centers in Europe
- GIC and GDS Holdings have partnered in a 90:10 JV to build and operate hyperscale built-to-suit data centers outside of Tier 1 cities in China. The first project was completed in 2019 in the Jiangsu province in China
All these data center projects over the past year reflect the unabated demand for data centers. Many enterprises are moving away from self-run data centers, with cloud adoption allowing them to save money and create a lot more value. Data centers are high on list for investors who are increasingly turning to alternatives in the hunt for asset diversification and enhanced risk-adjusted returns.
Investors are facing a record-low interest rates environment, and alternative assets like data centers are being pursued in the hunt for yield in new alternative asset segments that are perceived to offer robust growth and long weighted average lease expiries [WALEs] as evidenced in the aforementioned announcements.
The pipeline is also primed to balloon with the roll-out of 5G. Quicker transfer of data and greater efficiencies require a new set of technologies. This will spur the development of data centers, which house, protect and distribute the key parts of internet technology, operations and hardware.
Among these new developments is ‘edge computing’, a process that pushes applications, data and services away from centralized points to locations closer to the user, and in turn, specialized, smaller data centers built closer to population centers or so-called central business districts. For real estate developers, this is the realization that alternative real estate is going to be part of the 5G’s backbone.
Data centers are, however, particularly specialized and complicated investments, that need a sizeable number of assets in order to benefit from the advantages of building strong relationships with tenants and to be real player in a region such as the United States, Europe and Asia Pacific. The complicated part is mainly due to the in-house capabilities of this asset class which warrants more attention than those of the more traditional real estate asset classes.
A functional data center can add value and generate high returns if the property side and the data center side of the business are inextricably conjoined, namely through the physical technological hardware and the way the end user “tenants” wish to deploy and manage their data center portfolio now and in the future.
It is one of the sectors where few institutional investors are dedicated. Lack of liquidity is seen as one of the fundamental problems as this asset class is traded small, with tinier stock compared to other asset classes with lack of comparable transactional data and deal flow. The latter makes the appraisal and investment decision difficult.
For these reasons, coupled with the complex nature of data centers, due diligence can be demanding. Furthermore, obsolescence is a concern as a result of the speed of technological advancement. Another downside is sustainability given the vast consumption of power required to function the plant and equipment cooling.
But a few players are committed to the sector, and tenants and governments are content with the resilient and critical services provided in these challenging times. This asset class has therefore bullish prospects and it is strongly believed that institutional and retail investors will invest the time to understand the evolution of the product and the market and be flexible on the best way to approach the opportunity – to develop new assets, acquiring existing data center real estate, or buying data center operators. Notwithstanding this, with the help of data centers, governments, society and companies will continue to play a key role during the current and post COVID-19 pandemic but will also play the part again in any future crisis that may occur.
In the meantime, the hunt for yield continues.
PropSherpa 