01 September 2009 – Director Magazine
Off-site data centres are hot property again. Jessica Twentyman finds out for how long
The billionaire Reuben brothers have an enviable gift for spotting lucrative real estate opportunities. Worth an estimated £2.1bn, they have substantial interests in the Paddington Basin and London Olympic projects, and their portfolio includes numerous high-profile office blocks, racecourses, nightclubs, hotels, marinas and shopping centres across Europe.
But their latest speculation in data centres would send more cautious investors running for cover. In the late 1990s, a glut of speculative interest in data centre providers-which host and maintain back-end server computers in specialised premises on behalf of other companies-ended in disaster. When the dotcom bubble burst in 2001, many data centre providers collapsed.
One survivor was Global Switch. In January, the Reuben brothers bought a 75 per cent stake in the firm’s European assets that includes two data centres in London, and operations in Amsterdam, Madrid, Paris and Frankfurt. At the same time, they took control of its Australia and Singapore divisions. By June, they had snapped up the remaining 25 per cent.
In anticipation of a huge surge in demand, the Reubens reportedly plan to spend more than £170m in upgrading and expanding the company’s facilities.
They are not the only ones looking forward to the return of the booming nineties, either. In June, UK-based data centre provider IXEurope agreed a takeover by US rival Equinix for £240.9m, just a little over a year after its April 2006 AIM flotation-during which it reportedly received 13 acquisition offers.
Meanwhile current UK stock market darling TelecityRedbus, is building new capacity, in London and across Europe, and Digital Realty Trust, a US-based real estate investment trust (REIT), specialising in data centres, formally launched its European operations last November.
“We believe there’s significant opportunity in this highly specialised space,” says Bernard Geoghegan, vice president of Europe for Digital Realty Trust. For income-producing properties, Digital Realty expects an average capital rate in Europe (calculated by dividing net operating income by the purchase price) of 8.25 per cent per year. For redevelopment projects, Geoghegan expects returns of 10 to 15 per cent. There’s a reason for such attractive returns, according to Mark Trevor of property consultants GVA Grimley. “This is a market characterised by two aspects; strong demand and dwindling supply,” he says. “That makes it a prime target.”
In particular, regulatory requirements have increased the need for more data hosting to handle record retention and disaster recovery plans, adds Trevor.
Plus, older data centres are not always equipped to provide the power and cooling equipment needed to keep today’s massive computers from crashing, says Steve Wallage, managing consultant at data centre analyst group BroadGroup Consulting. And that means companies are beginning to shop around for next-generation facilities.
They should be worried about leaving it too late, according to figures from property consultants CB Richard Ellis. In London, for example, vacancy rates for data centres are predicted to fall from 19 per cent to just three per cent in 2009.
In continental Europe, particularly Germany, the picture may be more subdued, but the consultancy is still forecasting “an extremely buoyant 2007”.
But investors looking to profit from spiralling demand need deep pockets. “Assuming a site has the available power and connectivity, the cost of getting it ready for business can be anywhere from £700 to £1,100 per square foot,” says Digital Realty Trust’s Geoghegan.
Location, too, is a major factor. While almost anywhere from the Isle of Man to Iceland can house a data centre, there are technological and psychological reasons for companies to keep their data nearby.
According to Richard Warley, UK MD of data centre provider Savvis, connectivity costs between a company’s main site and its hosted data centre can be exorbitant, and may outweigh the benefits of locating data centres where land or power (or both) are cheaper.
And companies that require real-time replication of data between the two sites, are limited to distances of around 40 miles, which is why towns such as Slough have capitalised on their proximity to London.
In terms of psychology, “company directors get worried-and often rightfully so-about having valuable data situated somewhere remote, especially if there are political or climate risks” adds Warley. Steve Wallage of BroadGroup Consulting agrees. “While offshore data centres may be viable for niche applications, few companies are going to use them for serious, mission-critical operations. India, for example, has serious connectivity issues outside of its main business hubs and Iceland is associated with earthquake risk,” he says.
For Digital Realty Trust, then, that means focusing on more costly areas. “London is arguably the most space-constrained market in the world today,” says Geoghegan. “But other markets we like include Dublin, Paris, Amsterdam and Frankfurt.” In the US, meanwhile, Geoghegan sees similar potential in the New York metropolitan area, northern Virginia, Silicon Valley, Chicago, Phoenix and Dallas.
The good news is that the challenges presented by overheating servers and by regulatory requirements to back-up data to remote sites will ensure that demand for data-centre space remains steady for some time to come, according to Wallage of BroadGroup Consulting.
Far from the boom and subsequent bust of seven years ago, it seems, data centre investors can, at last, look forward to a period of stable, predictable returns.