With direct property valuations peaking, investors are searching for new ways to invest for growth. CFSGAM Head of Global Property Securities, Stephen Hayes, gives three reasons to consider investing in data centres, specialist buildings which house the infrastructure required to power modern internet usage.
1. Cloud computing is an established trend powered by data centres
The growth of cloud computing is creating a huge opportunity for data centre landlords. In 2016, cloud computing revenues grew 25% year over year (yoy) to US$148 billion. This outstripped all previous growth estimates. Cloud computing is expected to continue to grow strongly owing to the many efficiencies it creates and its cost competitiveness compared to leasing or payment for physical facilities. With the strong corporate adoption of cloud computing, some forecasters expect that on-site data storage for corporates will soon be a thing of the past.
2. Reliable data centres are expensive to build
The largest data centres use 100 megawatts of power which is equivalent to the amount of power used by 100,000 households. Data centres are very expensive to build due to the cost of the highly specified plant and equipment required. A turn-key data centre in the US can cost as much as US$1,000 per square foot to build. This is approximately double the cost of building an office skyscraper. Data centres contain state of the art floor vented cooling systems.
3. Data centres have a wide range of business models appealing to a wide range of customers
Customers vary from governments to telecommunication companies to very large corporates like Facebook, Google, Dell, Amazon and Microsoft. The large, publicly traded data centre landlords are focusing on the “carrier neutral data centre” concept. This involves having multiple telecommunication companies and internet providers in the one facility, which are then combined with the major cloud service providers. The end result is a series of very network dense data centres. This combination creates very valuable “ecosystems” for corporates as it enables them to link directly to the cloud service providers over a single physical port.
Some ways to invest in data centres
From a real estate perspective the development of wholesale data centres can be lucrative. Network dense data centres are very valuable assets ideal for long term ownership as they are very difficult to replicate, creating high barriers to entry. Network dense data centres are usually expanded in stages. The return on development of the expanded stages is very high, typically 15% -20% cash flow returns on employed capital. Also, on top of simply charging for tenant contracted power usage, network dense data centres can also generate revenues from other services such as interconnections.
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