In the latest Bayfield Training Webinar, Sonia Martin-Gutierrez, and Andri Rabetanety present: An Introduction to Data Centres. Global data consumption continues to rise, driven by the speed of connectivity, the growing base of smart devices, Internet-Of-Things (IoT) and Big Data based applications. The demand for data is supported by cloud providers who have developed data centres that provide space, power and cooling. This information-packed webinar assessed data centres as an alternative real estate asset class. The webinar provided an understanding of the drivers of investors’ appeal, the operational models, and how data centres differ from traditional real estate.
Data centres, the backbone of the digital age
As an asset class, data centres have attracted more than 100 billion dollars in the past ten years from diverse sets of investors, such as pension funds, private equity firms, infrastructure funds, and sovereign funds. This significant allocation of capital has been raised alongside major technological changes in server and switches technologies, storage protocol, and security algorithms. The IoT and increasing speed of connectivity will continue to contribute to the need for more extensive data infrastructure.
As Andri articulates, data centres are a large group of networked computer servers typically used by organizations for the remote storage, processing, or distribution of large amounts of data. Data centres were established in the 90s in response to the rapidly growing demand for off-site data storage from commercial and government organizations.
Classification of Data Centres
To clarify the classification system, Andri says that it depends “on the nature of the customer and the type of data centre services offered.”
In general, data centres are classified according to IP scale, colocation, telecom, and enterprise. An enterprise data centre is a private facility built to fit the need of one organisation. These are usually owner-occupied data centres, exclusively used by large companies to store their own data. They can be on-site as part of a large campus or off-site at a location selected for connectivity, power, and security. However, they usually require significant capital expenditure to build.
Next, there are telecom data centres. Specifically, a telecom data centre is a facility owned and operated by a telco service provider connected to network carriers such as AT&T, T-Mobile, or Verizon.
A colocation data centre is any large data centre facility that rents out rack space to third parties for their servers or other network equipment. It is a popular service used by businesses that may not have the resources needed to maintain their own data centre, but still want to enjoy all the benefits. There are two types of colocation centres, namely wholesale and retail. A wholesale colocation is when a company rents out an entire data centre. In contrast, retail colocation is when a company rents a set amount of rack, cage, or suite spaces within a data centre.
The benefits for the user that use colocation are lower costs, reliability, and scalability. Finally, there are IP scale data centres, a facility required in a distributed computing environment. These data centres provide the ability to grow the number of servers quickly to implement big data or cloud computing solutions. The three major cloud platforms have driven the creation and adoption of IP scale technology with massive data centres. For example, the CAPEX on hyper-scale enabled data centres totalled over $120 billion in 2019.
A Buoyant Capital Market
Next, Andri examined data centre investing in the context of the COVID 19 pandemic. Specifically, the sector took advantage of the work from home environment, which has accelerated the need for data storage, cloud outsourcing, and more connectivity. Demand drivers for data centres include 5g, artificial intelligence, and autonomous vehicles.
Furthermore, Andri explains that data centres have been one of the highest performing assets in the global reach market this year. For example, they provided returns of 17.6% as of June 30th 2020.
Business model based on technological specs
To conclude, “data centres have become highly specialised in terms of their location, power supply, connectivity, security and service requirements.”
Concerning their use as an alternative asset, data centres have similarities and differences relative to traditional real estate. As Andri describes, for larger occupiers, the contract to use space in a data centre is usually conceptualised with a conventional property lease agreement. However, the length of leases for data centres can vary widely. In general, large corporations require purpose-built spaces under long leases to ensure continuity of occupation. Thus, leases can be as long as 50 years.
Conversely, for sizeable lettings, leases for space may range between eight to 10 years. These leases generally provide full recovery via service charge for the landlord’s costs of maintaining and managing the structure. Data centres let on a colocation basis may be subject to specific service agreements stipulating that a tenant will pay a single fee that includes all the rents owed and the landlord services.
Furthermore, the manner in which data centres generate income differs from conventional commercial properties. The rental price for equipment space is a function of technological considerations, including the following: the amount of available power, cooling capacity, and emergency power generation availability. Critically, the bandwidth of your data carrier cabling outweighs the physical dimensions of the space. Consequently, Andre stresses that to assess the space’s ability to generate rental income, you need to be able to assess the technical specification. Thus, assessing rental value on a per unit basis can be tricky by reference to comparable transactions.
In sum, the investor should instead assess the building specifications and technical factors to see the overall opportunity to generate income. Nevertheless, the security of income will still be influenced by more conventional measures, such as the strength and the mix of tenant covenants, and the general term and length of the lease.