How data center demand is pushing investors to new markets
High pricing in established markets sees investors branch out
With data center investment ramping up, heated competition in more established markets is pushing investors to look further afield.
Mergers and acquisitions within the data center sector hit US$31 billion in 2020, up from US$ 16 billion in 2019, according to JLL.
In Europe, major markets like London, Frankfurt, Amsterdam, Paris and Dublin continue to dominate. But as a broader range of investors pile in, markets such as Madrid, Berlin and Warsaw are coming into focus.
“With pricing high in the more established markets, there’s a logical step being taken by investors into areas where there is less competition and evidence of potential for growth,” says Tom Glover, head of data center transactions for EMEA at JLL.
In Madrid, Digital Realty’s Interxion has bought land for a 34 mega-watt data center.
Another reason for the shift is the amount of land that has been taken up by sector specialists in more core markets.
“Land for development in and around those major locations carries a premium and finding opportunities is a challenge,” says Glover. “As major consumers of data centers look to expand, it’s inevitable that underdeveloped markets will come more into focus in the coming years. The challenge for the investor is anticipating where these markets are.”
Data center investment worldwide has ratcheted up during the pandemic, which has served to highlight a long-coming shift to an online life that requires data for everything from streaming services to buying groceries.
All that data flows through data centers. For investors, this increasing reliance is serving to boost the perceived stability of the once-niche sector.
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“Assets which offer reliable income have become increasingly sought after,” says Daniel Thorpe, senior research analyst at JLL.
“The turbulence and disruption felt by other real estate sectors over the past year, alongside greater use of data than ever before, has brought data centers to the fore as a resilient investment proposition.”
Interest from institutional capital is growing. Last year, Danish pension provider PFA took a 20 per cent stake in Data4, which finances, designs, builds and operates data centers in across Europe and is owned by AXA Investment Managers.
Investment is expected to continue climbing in the coming years.
“It’s a sector which appeals not only to institutions, but equally to private equity seeking out viable alternatives to other forms of real estate,” says Glover.
More to come
In Europe, the hunt for new opportunities hasn’t necessarily reduced demand in core markets. In the UK, Ark Data Centres recently acquired Renault Retail Group’s west London showroom and plans to convert the site, while in Ireland, TikTok is building a major data center. Such moves are expected to cement the sector’s appeal to a broader range of investors.
In the listed sector alone, the performance of data center REITs is revealing, rising 19.2 percent, compared to global REIT performance of -16.7 percent.
Yet even prior to COVID-19, investors were increasing their focus on the sector.
The appeal of data centers is also linked to the sheer weight of capital hunting real estate assets, estimated to be around US§ 336 billion, Glover says.
“The economic environment is ideal with bond yields low and record low interest rates,” he adds. “With record levels of dry powder, the alternative real estate markets are set for a big couple of years.”
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