14 May 2010 – GLG (Business consultants) website
Data centres are growing as an emerging asset class, with dynamic characteristics that are attracting investor recognition. Data centres are facilities used to house computer systems and associated components, such as storage systems and telecommunications. They generally include security devices, redundant data communications connections, backup power supplies and environmental controls (e.g. fire suppression and air conditioning).
Data centres are growing as an emerging asset class, with dynamic characteristics that are attracting investor recognition. Data centres are facilities used to house computer systems and associated components, such as storage systems and telecommunications. They generally include security devices, redundant data communications connections, backup power supplies and environmental controls (e.g. fire suppression and air conditioning.
While investing in data centres by institutions might not readily be considered as an asset class, the latest currents at play in the sector appear to be creating a confluence of factors that points to greater interest in the space. Data centres are really at the exotic end of investing in real estate but with a technical twist.
Ownership of data centres is often regarded as a sector within the property asset class because of the bond-like investment returns and mission critical services it provides. The sector has attracted the attentions of property investors such as the Reuben Brothers, who have owned Global Switch, one of the leading specialists in designing, building and operating data centres, since early 2007.
In terms of hard numbers, data centres have continued to attract significant levels of investment, with more than US$15bn committed to global data centres in the past 14 months. International strategies are also being pursued with a broad range of finance and investment approaches.
Operators are choosing from a range of financing options open to them including bonds, private equity, and IPOs, although constraints remain and for unlisted companies. There are also funds tracking the sector.
Driving the sector are a number of macro trends including dramatic broadband penetration in offices and homes, especially in the U.S. For example, the amount of bandwidth in most homes in the U.S. has risen from 1.5MBits to around 20MBits in less than a decade. The more bandwidth that gets to end points, the more data ends up being moved to data centres. The growth of U.S. video screens served up on the web, for instance, leads to huge demand for bandwidth from data centre infrastructures to serve all these increasing needs.
Private data centre companies such as Lockerbie Data Centres and Global Switch have plans to substantially increase their data centre capacity to try to stay ahead of significant growing demand for data housing.
According to a survey conducted in 2009 by CBRE, the global real estate specialists, at least 34 new and generally wholesale data centre schemes were expected come on stream by 2012 in Europe*, totalling 6.2 million sq ft at a projected capital amount of c.€8.1bn. By contrast, in the five major European data centre locations (countries) only around 6.9m sq ft of space exists today. (*CBRE’s survey was based on publicly announced schemes over a two-month period).
Public companies engaged in the data centre sector have outperformed on a 12-month basis the major indices like the Dow Jones Industrial Average and the FTSE100 and have continued to prosper. Investors that aim to profit from the boom in digital data processing and storage, and the shortage of such capacity could have access to the asset class via the quoted sector through a range listed companies such as Telecity, Equinix, Savvis, Digital Realty Trust and Akamai.
There is also the option to purchase a data centre outright or part thereof through real estate specialists in the area such as CBRE and GVA Grimley. A long-term investment in a fully let data centre with contracts spanning multiple years, provides a recurring steam of income.
Some of the best data centres have blue-chip clients residing in them and the applications are typically ‘mission critical’ (e.g. from proximity hosting for high-frequency trading to exchanges/market venues).
Technical real estate, like data centres, can be attractive to property investors as a hybrid investment. It has many of the characteristics of traditional property, including long-term contracts and recurring revenues, but with the added bonus of rapid growth prospects given the dynamics of computer, web and telecommunications storage needs.
The sector is not well understood, but is rapidly developing and emerging significantly. The marketplace, which is relatively immature, has traditionally been confined to consultants and engineers. However, big firms such as IBM, Morgan Stanley, Facebook and Yahoo are huge users of data centre infrastructure.
Some institutional investors are having difficulty understanding data centres and it confuses them on several levels. They struggle with the links between the real estate owners (i.e., the property company); the operators who run the buildings (i.e., the operating company); and the service level agreements and cross guarantees that run between them. Many institutional investors often prefer a simple structure, with either an operating company or a straightforward long term real estate investment.
The current market size of the sector can be an issue too. For certain institutions, 6m sq ft is seen as quite a small market, since many of the larger institutions could already hold in excess of 6m sq ft of real estate space. Consequently some institutions would decline the proposition and not bother getting involved.
At least three different models are used for valuing data centre valuation facilities: (a) discounted cash flow; (b) traditional market comparables; and (c) splitting the real estate and the fit out, where the fit out is amortised over a certain term.
Clearly, places where many telecoms and internet networks interconnect to exchange traffic will require massive data centre storage, contingency devices and security services as the demand grows exponentially. These developments are well worth staying on top of.