Investor appetite for data centres across Europe remains strong, fuelled by soaring demand for data capacity and further growth in the cloud, and propelled by colossal interest in AI technologies and changes to data sovereignty laws.
Among those taking a big bet on the sector is giant investment and asset manager PIMCO, which is reported to have already raised about €300m in investor commitments for a targeted €750m closed-end European focused vehicle - its first dedicated data centre fund.
It is thought the PIMCO European Data Centre Opportunity Fund will develop build-to-suit data centre facilities for hyperscalers across Europe, primarily in secondary markets, through its specialised vehicle Apto Data Centres.
There is no hard cap on the fund, so given investor interest in the sector, it could well reach €1bn or more in a second closing in a few months time. The fund's investors are mainly European, but there are also investors from the Middle East, the US and Asia. PIMCO's parent, Allianz, is providing seed capital for the fund.
According to a sustainability disclosure document dated December 2023, new data centre developments will comprise at least 70% of the fund’s total invested capital once deployed. PIMCO is targeting an IRR of 20% and an equity multiple of 2x from the fund’s investments. On financing, the firm will source construction loans at a loan-to-value of between 50-70%.
Launch of Apto Data Centres last year as dedicated vehicle
PIMCO launched Apto Data Centres last September as a dedicated vehicle to build and operate data centers for cloud service providers expanding in Europe and to manage Pimco's emerging data centre assets. At the time it said in its launch document that it could deliver customized hyperscale facilities to meet customer needs, and promised it could build them to order in prime locations where the service providers need them, via a proven design blueprint to make sure its facilities clear regulatory hurdles and would be delivered quickly with high quality.
© PIMCO
Kirill Zavodov, vice-president and portfolio manager, PIMCO
At the launch of Apto, PIMCO vice-president and portfolio manager Kirill Zavodov said: “We at PIMCO see data centres as a secular growth theme globally and therefore making both debt and equity investments both in the US and Europe. In Europe, we see the opportunity set as more attractive compared to the US as the market is more under-supplied and lagging US by approximately five years as it relates to the installed data centre capacity in the largest European data centre markets like Frankfurt, London, Amsterdam and Paris.”
Biggest growth expected in 2nd- and 3rd-tier markets
Zavodov said he expected the real growth over the coming five years to be in the tier two and tier three markets, given increasing infrastructure constraints, such as power and water, in the so-called FLAP-D markets (Frankfurt, London, Amsterdam, Paris, and Dublin which represent most of the overall European data centre market).
Zavodov added: “The tier two and tier three markets are the most interesting at the moment as these markets represent a considerable whitespace for developing new data centre capacity… we have been using our on-the-ground sourcing capabilities to assemble a pipeline of development opportunities in the data centre space of about €4 billion of all-in cost. In fact, we have already acquired our first asset (in Madrid) and have started the development works on site.”
European market to grow five-fold over next decade
A report published in February by Morgan Stanley forecast more than five-fold growth in the market for European data centres by 2035, from less than 4,000MW capacity today to around 20,000MW in 10 years’ time. This represents much faster growth than for the US data centre markets, which the report says has a market penetration more than three times that in Europe.
While the Morgan Stanley report sees growth of 60% of European data centres over the coming decade in the FLAP-D cities, it says the growth will be even stronger in cities such as Milan, Madrid, Warsaw, Athens and Scandinavia. These are predicted to grow at 22% percent annually in the next five years, versus 16% for the FLAP-D markets.
These big tier-1 markets are increasing attracting the attention of regulators, who are coming under political pressure to contain the rampant spread of data centres in their jurisdictions. In Frankfurt, for example, limits on zoning are making data centres increasingly unwelcome in the city. Energy supply is a big issue, with the growing hunger for power not being met by a growth in supply, and particularly not for the green and renewable energy that is needed (and is more widely available in Scandinavia, for example).
Ireland, too, is reconsidering its whole approach to welcoming data centres as it faces growing criticism for the disproportionate amount of energy the sector consumes.