Data centres are increasingly viewed as lucrative investment ventures
As Germany cements its status as a critical hub for digital infrastructure in Europe, the data centre industry is experiencing unprecedented growth, spurred by demands from artificial intelligence (AI) and escalating data consumption. This expansion is now reaching beyond traditional centres like Frankfurt and Berlin, propelling cities across the country into the spotlight of digital real estate investment.
The German data centre market is broadening its horizons, with significant capacity increases projected in cities like Berlin, which expects to reach up to 700 MW by 2027. Helge Scheunemann, the highly-experienced Head of Research at JLL Germany, emphasizes the unique attributes contributing to Berlin’s rise: “The combination of a digitally proficient economy, the BCIX internet node, substantial wind energy supply from Brandenburg, and competitive land costs are creating an ideal environment for data centres.”
Berlin has now moved up to sixth in the list of Europe’s largest markets, just behind the so-called FLAP-D cities (Frankfurt, London, Amsterdam, Paris and Dublin) - with London still leading the field with a total capacity of 949 MW.
Frankfurt, known for its global connectivity facilitated by the DE-CIX internet hub, continues to be a stronghold in the market with a growing IT load capacity. The city’s strategic importance is magnified by its role in international data traffic and its burgeoning IT infrastructure, poised for further expansion.
The big constraints - regulation and energy
Data centres are increasingly viewed as lucrative investment ventures due to their high returns and critical role in supporting digital economies. However, investors face challenges, such as stringent regulatory environments and immense energy requirements, which can impact operational sustainability and profitability.
Björn Wagenknecht, Senior Director at JLL, notes, “Data centres are essential for both individual and corporate digital activities, driving demand for real estate capable of supporting high power and advanced cooling systems.”
But while the sector promises attractive returns, the profitability of data centres is under scrutiny. Operational costs, primarily driven by energy consumption, represent a significant portion of expenses. The German Energy Efficiency Act mandates increasing reliance on renewable energy sources, influencing investment decisions and operational practices.
“The move towards sustainability is not just a regulatory compliance issue but a significant operational consideration that impacts profitability,” Wagenknecht adds.
Electricity demand set to double by 2030
The Berlin-based PREA Group recently produced a research study which underscores the expanding data centre market’s trajectory, with electricity demand expected to double by 2030. Gabriel Khodzitski, CEO of PREA Group, provides insight into the challenges and opportunities: “The growth we’re observing is robust, and the demand from investors reflects confidence in the sector. However, the market’s complexity requires a sophisticated understanding of both technological and regulatory landscapes.”
Khodzitski further highlights the potential of integrating data centres into urban heat networks, which can enhance their efficiency and public acceptance. “Data centres can significantly contribute to local energy solutions, turning a potential environmental burden into a community asset”, he added.
Investors are increasingly drawn to Germany’s data centre market, not only for its growth potential but also for its strategic importance in the global digital infrastructure. The development of hyperscale data centres, which offer vast storage and computing capacities, is particularly noteworthy. Companies like Microsoft are investing in large-scale facilities that not only bolster their cloud services but also drive local economies.
First data centre fund for institutionals
Just recently, private bank Hauck Aufhäuser Lampe launched one of the first funds for institutional investors to invest directly in data centres. According to Patrick Brinker, head of real estate investment at the bank, “Due to the Energy Efficiency Act, we are mainly focusing on new construction projects and newer existing properties as suitable investment properties. Overall, the market is still very opaque because there are still few transactions compared to the real estate market, and the data centres are very individual and therefore difficult to compare. In general, however, we believe that returns of between six and eight per cent on average per year are achievable.”
He added: “Demand from investors is rising sharply, especially as this asset class is not yet present in most portfolios and thus contributes to risk diversification. Added to this are the returns, which are higher than for traditional property investments.”
Another company raising large funds is investment manager PIMCO, who is reported to be raising money for a data centre fund with a target size of €750 million, to be invested exclusively in Europe. Last autumn, PIMCO launched a new developer and operator of data centres in Europe, called Apto, which will build and operate these data centres - primarily hyper-scalers - for cloud service providers expanding in Europe.
The fund will avoid investing in Frankfurt, instead focusing on Tier 2 and Tier 3 markets, which PIMCO says still lag well behind the US in terms of installed capacity, but are growing much faster than Tier 1 markets and offer greater potential for future growth. These Tier 2 and Tier 3 markets included cities such as Hamburg, Düsseldorf and Munich.
Sustainable energy practices crucial
The German data centre market is at a pivotal juncture, with growth driven by digitalization and the global shift towards cloud-based solutions. While the market offers substantial returns, investors have to navigate complex regulatory environments and significant operational challenges.
As the industry evolves, the ability to integrate sustainable practices—such as waste heat recovery and renewable energy sources—will likely dictate the long-term viability and success of data centre investments. The insights provided by market leaders and analysts underscore the need for a nuanced approach to investing in the sector, and understanding the intricacies of the market.