Data centres: existing beats imaginary

Across the globe, demand for computing capacity is accelerating. Global power demand from data centres is forecast to increase 165% by 2030¹.

Unfortunately, the infrastructure needed to satisfy it, electricity, transmission, substations, cooling and planning approvals remains stubbornly, awkwardly physical.

This inconvenient fact is reshaping the data-centre market worldwide and presenting opportunities for investors prepared to look a little deeper into the sector.

The paradox of rapidly increasing digital demand and obdurate physical supply is an opportunity. At the recent Rhombus Advisory conference in Ho Chi Minh City, Vietnam, analyst estimates suggested hyperscaler capital expenditure will rise from about US$388billion in 2025 to US$630 billion in 2026.

This breathtaking sum is having a huge impact. The Economist wrote in August last year that, “Something like a sixth of the 2% rise in American GDP over the past year has come from investments in computer and communications equipment, including chips, and data centres.”

Given the money flooding into the sector, the reliance on AI infrastructure is likely to have only accelerated since.

And yet this isn’t a new phenomenon. Long before ChatGPT, cloud computing, storage and streaming were contributing to the huge growth in global digital data. AI has poured petrol on a roaring fire. With corporate adoption barely underway (see chart above, right), today’s computing requirements could look modest compared to what’s ahead.

Data centre growth is one of the major themes I addressed in an insights article I wrote in June last year (see Demographics and Technology: Themes driving Global REIT opportunity). Since then, the opportunity has only deepened.

The reason for that is straightforward: while the demand side of the equation is clear, the supply response is constrained and complex.

The general public tends to see data centres as large sheds filled with expensive computers. Yet every facility requires grid connections, transformers, land, regulatory approval and lots of reliable electricity.

Power transformers face delivery times of two to three years and grid bottlenecks can add two years or more to construction schedules. Last December, the Financial Times reported that “data centres face wait times of up to seven years to connect to the grid” while some are purchasing jet engines to shorten delays.

Then there are the growing financing and building costs, scarce serviced land and planning delays, exacerbated by growing public distrust in the sector.

The contrast with industrial development is useful. Logistics projects benefit from relatively simple buildings and short delivery periods, lowering the chance of demand or capital markets changing before completion. Data centres, on the other hand, are technically complicated, power-hungry and hostage to someone else’s infrastructure.

For investors, the temptation is to pursue the biggest development pipeline and think of it as growth. Unfortunately, these investors may be swapping the prospect of future operating income for construction, financing and pre-leasing risk, plus a potentially troubled relationship with the electricity grid. There is a huge difference between a development pipeline and an income stream.

We’d suggest another approach. Existing data centres have already cleared the hurdles confronting new builds developments. They possess something increasingly difficult to reproduce: live, reliable capacity.

Established operators are already collecting rent and colocation income. Customers are reluctant to move critical systems, while interconnection - the web of networks, cloud platforms and customers inside a facility makes successful centres more useful as they grow.

This is a crucial point. The moat of a data centre is not the building but the power, connections, tenants and ecosystem inside it. Existing operators can also benefit from lease resets, expansion within established locations and development on sites where power and approvals have already been secured.

This should place global REITs such as Equinix a conviction holding in the Dexus Global REIT Fund at the forefront of investors’ minds.

Not every proposed data centre project will secure power, arrive on time or earn an acceptable return. Those that already exist are far better placed to do so, in our view.

With robust development economics and reduced risk where preleasing is possible, this is a sector offering the prospect of higher growth, something that the Dexus Global REIT Fund is already taking advantage of.

The Fund invests in a portfolio of Real Estate Investment Trusts (REITs) listed in North America, Europe and Asia Pacific. We focus on regions and property types where developing structural trends like data centres and local fundamentals are driving sustained rental growth and total investment returns.

We’ll admit this isn’t the heroic version of the AI trade. It requires no robots or moon bases just scarce, connected assets collecting rent while the digital economy competes for capacity. For us at least, rarely has dull infrastructure looked so interesting.

To stay up to date with all the insights by the team at Dexus, click here