Data Centre Investment: Key Considerations for Investors in a Booming Market

As JLL's Charlie James noted at the recent Data Centre Investment Conference and Expo (DICE), it was nice to be at a conference with positivity and there is no surprise as to why. With investment in the sector having increased 200% since 2016, investment is expected to increase a further 89% by 2028 as more opportunities emerge.  

The hyperscale effect: Rising power demands drive sector expansion

Hyperscale tenants (i.e. the Microsofts of this world) want more power than ever and any hyperscaler requiring 40MW of power today will no doubt require 100MW in a few years. This is especially the case if a hyperscaler is expanding into the AI arena, with an AI platform requiring around five times more power than supporting a cloud platform alone.

 AI expansion: The new frontier for data centre power requirements

Some investors may shy away from targeting AI opportunities through fear of being unable to source the necessary power. This is a fair concern for investors who do not have land banked in urban locations where there may be a shortage of available land and power. Whilst it is these locations where the iteration component of AI would typically be located, in order to be close to customers, the learning component of AI can be located remotely, outside of mature markets like London and providing hopeful opportunity to investors struggling to enter the urban markets. 

Portfolio diversification: Data centres as a long-term growth asset

So why is there such a surge of interest in the sector? Many investors are looking to rebalance their portfolios, making data centres attractive given the long term trends in growth and rents. The options to enter the market are expanding, owing to take-privates in the sector and diversification of a market which a few years ago was dominated by self-build hyperscalers and listed companies.

The European shift: Hyperscalers eye remote locations for expansion

Following trends in the US over the last two-three years, hyperscalers are expected to expand into more remote European locations, thanks to improvements in fibre connectivity reducing concerns around latency and the need to be close to cities. Add that to the appeal of an “AAA” hyperscale tenant, it is easy to see why the ferocious investment in the sector is not expected to abate any time soon. This is certainly a trend we are seeing borne out in our own transactional activity.  

 Time is of the essence: The race for timely data centre investment

Although diverging from the positive overtone of the conference, one message was very clear: if you are serious about investing in the sector, there is no time for delay. A very serious concern amongst investors is whether funds targeting the sector will be raised on time. Market supply is limited, not least because of power and permitting constraints, and when an opportunity does arise, it will be the well-prepared and nimble investor that takes the prize. 

Expertise is key: The importance of specialised knowledge in data centre investments

In the race to get there the quickest, investors could look to M&A or joint ventures with specialised operating partners to ensure they have the market intel and skill to act quickly when a potential opportunity comes to market. One of the key reasons for failed investments in the sector is lack of expertise, often leading to costly design mistakes and drastic delays caused through errors in the power application process. Teaming up with a highly skilled operator could help avoid this. Critically, it is important for investors to keep their eye on the ball, be pinpoint accurate on the target tenant's characteristics and design requirements and not get caught up in the noise surrounding the sector. 

Building relationships: The critical role of customer engagement in data centre success

This is also a relationship game. Data centre investors and operators need to be engaged with their customers and flexible to changes in optimum data centre design. Given the cost of capital, it is crucial to be certain of your build. But the most successful investors in the market will also be adaptable, innovative and put their relationship with hyperscalers at the forefront.

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