Germany harnesses data surge for real estate growth

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Against a highly uncertain background for German commercial property heading into 2024, two asset classes seem to be emerging as investors' top choices - logistics and data centres. Data centres, in particular, are being looked at by an ever-larger circle of investors, perhaps inspired by growing awareness of the burgeoning volumes of data fuelled by ChatGPT and its brethren in the generative AI industry.

Logistics is not surprising, given the megatrend of reconfiguration in supply chains globally, while the sector allows for sizeable investment volume and big-ticket deals. Even speculative developments are getting financing, since any new supply built enjoys scarcity value, due to the lack of available land, partly due to local authorities' unwillingness to grant new permits.

This scarcity of land, allied to bottlenecks in power supply and regulatory issues, is also what's driving demand in the data centres market. Energy supply, particularly green renewable energy, is constrained, while the market struggles to keep up with the demands of technology, which is estimated to push demand up by 61% between now and end-2025. The lack of green energy has seen many data centres opting instead to locate in the Nordic countries, where green energy is more plentiful.

Despite this, the German data centre market is set to grow exponentially, with electricity consumption rising from 1.94 gigawatts at present to 3.99 gigawatts in 2030, according to data from the PREA Group.

Wide range of centre sizes

Figures from the Berlin-based PREA Group show that the range of properties that will be required for this in the coming years extends from small data centres (Edge centres) to Colocation centres and Mega data centres (hyperscalers). The power consumption can be more than 500 megawatts and therefore far higher than that of a small town. According to PREA, the investment volume will amount to around €35 billion by 2030, with investor demand increasing accordingly.

At a recent lively online discussion forum organised by Berlin-based communications agency RUECKERCONSULT, Gabriel Khodzitski, CEO of the PREA Group, Patrick Brinker, Head of Real Estate Investment at Hauck Aufhäuser Lampe (HAL), Jörn Fingerhuth, Partner and Head of Property at the law firm Pinsent Masons, and Stephan Freitas Krause, Vice President of KfW IPEX-Bank, spoke about the asset class Data Centres.

Hauck Aufhäuser Lampe (HAL)'s new fund

Patrick Brinker of the Berlin-based private bank Hauck Aufhäuser Lampe (HAL) said his bank launched one of the first funds for institutional investors to invest in data centres. "The real estate adage 'location, location, location' also applies to data centres, but under different location conditions. Decisive factors include the availability of electricity and tenants as well as the security of data transmission. Due to the Energy Efficiency Act, we are mainly focussing 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."

Brinker said the launch was in response to higher demand from investors, "particularly those for whom the asset class is not yet present in their portfolios, and which could contribute to risk diversification. Added to this are the returns, which are higher than for traditional property investments."

An investor's perspective

Stephan Freitas Krause, Vice President of KfW IPEX-Bank, cast some light on the financing aspects: "In contrast to traditional real estate, the majority of the investment costs flow into the technical infrastructure such as electricity, cooling or connectivity. This accounts for up to 80% of the total costs. Overall, we are seeing a sharp rise in demand for financing, driven in particular by major hyperscaler customers. In the German market, larger financing deals are being requested for Frankfurt and Berlin in particular, but also in other German economic clusters where IT outsourcing is playing an increasingly important role."

Although the business plans for edge data centres are still in the starting blocks, Krause said these types of data centres will play a greater role in the future as soon as the adoption of applications from the fields of artificial intelligence and digital automation picks up speed.

PREA developing Berlin's largest data centre

Khodzitski of PREA said his company is currently developing the capital's largest data centre in Berlin-Lichtenberg. "The special task at this location was initially to obtain a permit without a development plan and an exemption in accordance with the Federal Emission Control Act. We mastered this extraordinary challenge. We are currently examining a project pipeline of a further 300 megawatts for Berlin."

The "Bluestar" project in Rhinstrasse in the Lichtenberg district has an investment volume of one billion euros and is being realised by PREA for the Van Caem family office. The data centre will have an output of 100 megawatts (MW) and a capacity of 70 MW when it goes into operation. Commissioning is planned for 2026. Planned as a hyperscale solution, the entire campus will be leased to a single operator.

Positive aspects for local authorities

Local authorities are generally open to the construction of new data centres if the advantages are presented accordingly. Khodzitski said: "Data centres can be a new form of combined heat and power plant if the waste heat is used. To do this, the buildings need to be centrally located and not on the periphery so that the heat can be utilised sensibly."

"Our project in Berlin can supply around two million square metres of residential and commercial space with heat," said Khodzitski. This makes Bluestar one of the few data centres in the DACH region that makes its waste heat available for heating purposes in a relevant range of 50 to 100 percent.

The prerequisite for efficient waste heat utilisation from renewable sources is the comparatively central location in a densely built-up district with hospitals, an industrial estate and 30,000 apartment units - in buildings with eleven or more storeys. The heat energy generated can thus be utilised for the surrounding buildings.

From an investor's perspective, Stephan Freitas Krause confirmed the importance of an energy-efficient data centre, which is becoming increasingly unattractive for investors and banks without a high level of efficiency or a lack of renewable energy or waste heat utilisation options. On the other hand, data centres, whether large or small, can play a key role in heat planning and play a positive part in the heat transition.