Presentation | Initiatoren | Specialist article


Real estate asset class: data centre- A growth market but an essentially overlooked real estate investment?

By Sebastian Kuhn and Roland Wollnik, CORPUS SIREO Real Estate

 

It is a vital part of digitalisation; lots of companies and private individuals are now using it: the cloud. But what is not physically tangible for the end consumer, because the data seems to appear virtually out of thin air from the cloud onto smartphones, tablets and PCs, is actually stored on the ground in huge data centres. Major players regard the market for cloud products as a strong growth market with double-digit rates of revenue growth (30–40%)[1]. In summary: there will be a rise in demand for data centre capacity.[2] Investments in data centres in Western Europe are expected to total 52 billion US dollars in 2016 alone (according to DatacenterDynamics).[3] Therefore, what opportunity is there for the real estate sector to participate in this growth?

It goes without saying that data centres are not a typical real estate asset in a traditional sense, and present a unique set of requirements concerning location and building quality.

 

The location factors for a data centre ultimately include the requirements of the customers. For example, these may be a high-performance connection to the nearest Internet hub, low electricity prices or the laws of data privacy of a specific country. The DE-CIX Internet hub in Frankfurt is well known as the world’s largest commercial Internet hub, which is why Frankfurt is seen as such a hot spot in Germany. In terms of electricity costs, Sweden attracts investors with prices of 6 cents/kWh. This is possible thanks to widely available hydroelectricity. Germany is 250% more expensive with prices of 15 cents/kWh.[4] In 2015, Facebook opened the largest data centre in Europe comprising 27,000 m² in Luleå, Sweden, where it operates 100% using renewable hydroelectricity.[5] The EU is the global trailblazer in terms of data protection with its EU Data Protection Directive, according to Intralinks. Within the EU, countries like Germany, the UK and the Netherlands are frontrunners.[6]

 

The location quality, and thus the competitiveness, of a data centre is therefore determined less by the real estate market and much more by general infrastructure and regulatory conditions. With new builds in particular, government subsidy programmes also influence the choice of location in underdeveloped areas. One of Germany’s largest data centres in Biere near Magdeburg, was subsidised by the state of Saxony-Anhalt to the tune of €8.5 million.[7]

 

Real estate valuation is made difficult by the distinction made between the building shell and built in installations specific to the data centre. These normally exceed the costs of the building itself. The costs for a plot and building shell usually account for a third of the total investment costs. The rest goes towards technical facilities such as cooling, electricity supply, security and data processing. Global Switch puts investment and building construction costs at €3,000 – €30,000 per m² of data centre floor space.[8]

 

How about investment capability?

According to the technology giants, the demand for data centres is increasing. Of course, whether a company opts for an ownership model or a rental model depends largely on the required flexibility in terms of floor space and term, and equally on the current financial situation of the company. In addition to this, there are the issues of exclusive access to the data centre and avoiding third-party dependence. Data centres are a core competency for major IT companies in particular and, as such, specific protective measures should be taken.

 

Major market players such as Apple, Google, Facebook and the like are therefore investing billions to construct their own data centres. These companies have high utilisation rates and high cash reserves. Apple alone is investing €1.7 billion in two data centres in Ireland and Denmark.[9]

 

On the other side of the coin, the biggest data centre REIT “Digital Realty” has a portfolio of 130 data centres worldwide (market capitalisation €14.5 billion)[10]. This offers private investors access to the market. Due to the high specificity of the asset class and lack of transactions, there are hardly any reliable benchmarks on return ratios. If the investor is merely providing the building shell, and all the data-centre-specific installations are undertaken by the tenant, the property can be classified under the asset class for industrial properties or production facilities. The usual returns for these properties are between 6% and 10%, which are attractive numbers provided there is a long rental contract in place.

 

But even customers of data centre operators request rental contract terms of ten years or more once they have decided on a particular location. The aim of this is to protect the usage rights and the investments made in these data centres. Ultimately, moving out and relocating technology is expensive and normally exceeds the lease payments. This can be easily determined by comparing the rental costs for various operator models. For industrial properties, the pure rental cost of the building is typically “only” between €2 and €6 per m². But when the data-centre-specific technology is factored in, the costs can be as high as €100 per m² or more, depending on the particular operator model. The location-dependency of the tenant should thus be regarded as higher than with almost any other real estate asset. As long as the tenant has a good credit rating, the operator can count on a reliable cash flow for a long period of time. Things become more difficult when it comes to alternative appropriate uses of the property. If the tenant moves out, a considerable sum of money needs to be invested in making the property attractive for new tenants and their requirements. Investors often recoil at this, especially because these costs are difficult to calculate.

 

Overall, data centres are a specialist real estate asset class with many specific characteristics. Investors who have intimate knowledge of these characteristics will manage the risks and can take part in the tech industry growth story.


[1] https://www.bitkom.org/Presse/Presseinformation/Markt-fuer-Cloud-Computing-waechst-ungebrochen.html

[2] http://de.statista.com/statistik/daten/studie/216291/umfrage/laenderranking-der-weltweiten-investitionen-in-rechenzentren/

[3] http://de.statista.com/statistik/daten/studie/419785/umfrage/prognose-der-investitionen-in-rechenzentren-in-westeuropa/

[4] Swedish Trade & Invest Council

[5] http://t3n.de/news/sieht-facebooks-neuestem-473134/

[6] http://www.heise.de/ix/meldung/Westliche-Laender-haben-beim-Datenschutz-die-Nase-vorn-2169187.html

[7] http://www.salzland-journal.de/1219/ueber-100-millionen-fuer-ueber-100-neue-dauerarbeitskraefte/

[8] Global Switch: Das ideale Gebäude für Data Center aus Sicht eines Betreibers P. 7

[9] http://www.welt.de/wirtschaft/webwelt/article137744880/Apple-baut-sich-eine-eigene-Datenwolke-fuer-Europa.html

[10] http://investsnips.com/digital-realty-trust-inc-dlr/ finanzen.net