Data centres enter the fray

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Markets

Real estate investors are always on the hunt for the next ‘hot’ asset class. In their constant search for new, lucrative products, a new one has just joined the pack: data centres.

Although the sector is still nascent, investor interest is on the up: ‘It is an up-and-coming niche,’ Dr. Jan Linsin, head of research Northern Cluster at C&W, told REFIRE. ‘Interest is operational rather than real estate driven, so some investors might prefer to buy a stake in an existing data centre operator rather than to acquire the underlying real estate. However, there is little information available; it’s not at all transparent,’ he warned.

Data centres fall into four main categories: colocation, corporate, cloud and edge – although edge hasn’t taken off in a major way in Germany yet, according to Michael Dada, associate director, and data centre expert at CBRE in Germany: ‘Germany is no different to France or the UK when it comes to data centres,’ he said. ‘Most deals in cities such as Frankfurt, London, Amsterdam and Paris (FLAP markets) are happening in the colocation space and the main operators are companies such as Global Switch and Telehouse.’

In January, US-based edge data centre specialist EdgeConneX acquired a data center in Munich at Landsberger Straße 155 for an undisclosed sum. The centre will offer a carrier-neutral facility for cloud, content, network and IT providers to deploy their infrastructure in close proximity to customers in the region.

‘Munich has been an historically important market for network and content peering and is now seeing substantial growth as a cloud epicenter as well,’ said Dick Theunissen, managing director EMEA at EdgeConneX. ‘This, coupled with demand from customers, primarily to serve the region and create an alternative to Frankfurt, has driven our entry into Munich.’

Munich is a strategic network location in Europe as many European long distance fiber cables from Frankfurt to Vienna pass through the company’s newly acquired facility – which serves as a critical traffic offload and network redundancy point in the region. The new facility will be ready for new customer deployments later this quarter.

Also in January, US-based collocation specialist, Equinix, acquired a commercial building at Vierenkamp 1, Hamburg, for €9m. The global colocation operator is investing an additional €22m to convert the former industrial building into its first Hamburg colocation data centre with 12,000 sqm across two storeys. The redevelopment will deliver 375 cabinets in phase one with the ability to expand to 1,875 cabinets at full build. It is due to be completed by the end of the third quarter this year.

‘The German economy continues to be a source of strength in Europe, and demand for interconnection continues to rise to meet the IT transformation needs of businesses,’ said EricSchwartz, president of the EMEA region at Equinix. ’By expanding to a fourth market in Germany, Equinix will provide multinational customers with greater choice of where they build their digital edge.’

One way for real estate investors to access the data centre sector is to buy a stake in an operator, as AXA IM Real Assets did, albeit in stages, with DATA4. In July 2018, AXA IM Real Assets increased its ownership in European data centre owner and operator DATA4 from 37% to 100% from funds managed by Colony Capital for an undisclosed sum. AXA IM Real Asset’s CEO Isabelle Scemama described the acquisition at the time as providing the group with ‘meaningful exposure to the growing digital infrastructure sector and its attractive demand-driven potential’.

The majority of data centres in Frankfurt are colocation spaces, according to Dada. ‘Corporate data centres are of most interest to institutional investors,’ he said. ‘They are sold off as sale-and-leasebacks but normally only generate a couple of deals a year.’

Given that transparency is key for institutional investors, data centres are unlikely to be very attractive to them – yet, according to Linsin. ‘They are more likely to appeal to opportunistic investors or those who have specialized knowledge of the sector, such as some REITs,’ he said.

Take-up hits new heights

Take-up in Europe’s four largest colocation markets - London, Frankfurt, Amsterdam and Paris - reached a record high of 194 MW last year, equating to capital expenditure of around €1.4 b, according to CBRE, thereby surpassing the previous record set in 2016 of 155 MW.

‘To get into the data centre market, you need to understand the sector and the site in question,’ said Dada. ‘You also need to understand security issues and what makes a data centre re-lettable. To interested investors, I’d recommend going with a power shell deal- where you just buy a data centre shell -to start with, although you need to be aware of the ongoing maintenance costs. Ten years ago, most centres ran on 1-2 KW per sqm. Today, that has doubled.’

Predictably, cloud services are fuelling growth in data centres. Indeed, cloud data centres accounted for almost 80% of all take-up in FLAP markets last year, according to CBRE. Google, Amazon Prime and Microsoft have all invested in cloud services. Microsoft has built two new data centres in Germany – one in Frankfurt and another one close to Magdeburg - according to Linsin.

‘In the past, data centres tended to be around 30,000 sqm,’ said Dada. ‘However, today, due to a big increase in cloud services, they are typically around 100,000 sqm. New cloud service providers are driving this via their cloud services. It’s hard to build centres that size near big cities, such as Frankfurt, but tenants are becoming more flexible about where they are, ’ he added.

Data centre provider Interxion has built four-to-five data centres in Frankfurt in the past two years, according to Linsin. ‘Their newest €17m project ‘FRA 15’ will add 9,600 sqm new space and 20 MW additionally to Germany’s capital of data centres. Actually, we see a lot of newly built data centres in Frankfurt,’ he said.

And a number of data centres have been changing hands. In 2017, US REIT CyrusOne acquired Zenium Data Centers for $442m. Zenium operates four data centres across London and Frankfurt that, at full buildout, could offer around 24,150 sqm of collocation space and 49.3 MW of capacity. CyprusOne is currently in the process of building its third data centre in Frankfurt, which will include two interconnected four storey data centres totalling around 11,500 sqm and a critical IT load of 22 MW with multiple fibers providing carrier neutral connectivity.

Typical real estate yields for data centres are around 5%, which rises to 9.5% if you include having a stake in the operator, according to Linsin. ‘Operators tend to build the facilities for themselves and keep them on their balance sheet,’ he said. ‘In our survey (with CoreNet), I was surprised that operational security wasn’t considered to be very important because the two most important aspects of data centres have to be the security and power. You need 24/7 comms/power.’

Edge data centres - bringing memory and computing power closer to the location where it is needed - will be a bit like last mile logistics, according to Dada: ‘However, they will be tiny compared to most data centres, from just the size of a postbox to up to 2,000 sqm,’ he said. ‘They will be useful for autonomous driving or connected driving, for example, where cars can communicate with each other and where it might be necessary to have multiple back-ups of data near the source, i.e. motorways. However, in terms of power usage, co-location leads the way, followed by cloud, which will overtake it.’ (ssk)