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News & opinion

24 9月 2018

Investing in data centres

With the rising influence of Industry 4.0 and the Internet of Things (IoT) across the globe, data centres have been attracting strong investor interest. The mainstream adoption of cloud-based services has led to an all-time high for investment activity in this sector.

In fact, 13.2% of Asia-Pacific investors have already invested or are considering investing in data centres, according to a CBRE report.

Despite investors’ increasing appetite for this emerging asset class, the data-centre sector is still prey to many misconceptions — namely, that although a data centre is a building, much of the value is in the service it provides. Therefore, it’s essential for investors to do their due diligence and understand the challenges and opportunities of this complex asset class, before taking the plunge.

An evolving landscape

The data-centre industry is constantly evolving. Initially, companies stored data and their servers on their own premises. However, as enterprise IT requirements continued to grow in scale and complexity, more businesses shifted away from on-premises in favour of colocation. This approach involves companies housing their own IT equipment in data-centre facilities managed by third-party specialist operators, while still retaining responsibility for their hardware.

The increasing popularity of further outsourcing to cloud services has shifted the paradigm yet again. In the coming years, companies will have to grapple with strategic decisions about whether to buy and manage their own IT hardware, or utilise the growing pool of cloud resources available through increasingly sophisticated and large-scale service providers. Given this ever-changing landscape, it’s vital for investors to stay on top of the latest industry trends so they can develop a sound investment strategy.

Look before you leap

As a relatively new and uncharted asset class, data centres can pose several challenges for potential investors. Since this sector has yet to see a full market cycle, it can be difficult to assess what value a legacy asset might have at the end of the lease.

MEES

As investors venture further afield from "core" commercial real estate assets, how this will affect their risk profile?

A risky business

As we enter the current cycle’s later stages, investors must be wary of not falling prey to ‘style drift’ — allocating capital to assets not normally within their investible universe — to gain a bit of extra yield. However, alternative assets, such as data centres, can affect the risk profile of a traditional real estate portfolio in different ways and could behave differently if a period of market stress were to emerge.

Sean Ellison
Senior Economist, Asia Pacific, RICS

A key point for investors to understand is that the real estate component of a data centre can often represent only 15–20% of the overall investment, with mechanical and electrical (M&E) infrastructure accounting for 80–85%. As a result, investors should ascertain how much “useful life” M&E can provide before re-investment is needed, to make an informed decision. Here are some factors to consider before buying an asset:

  • What is the specification and condition of the M&E?
  • What responsibility does the tenant have for the M&E equipment on an ongoing basis and at the end of the lease?
  • What is the tenant using the facility for? Is it to house their own IT equipment or to sell space and services to other customers?

Another factor to bear in mind is the scarcity of high-quality assets and sites, particularly in Tier 1 markets like Singapore, Hong Kong, Tokyo and Sydney. In these sought-after markets, underutilised or poorly managed facilities risk facing steep competition from larger data-centre operators. To avoid these potential pitfalls, investors need more than a cursory understanding of this complex sector.

Land of opportunity

While the prospect of investing in data centres might seem daunting, this sector is also rich in opportunities for investors willing to familiarise themselves with this alternative asset class.
Fuelled by the rise of cloud computing, Big Data and IoT, the demand for data centres is at an all-time high and will only keep growing stronger. This is particularly true for the Asia-Pacific region, where technology adoption is speeding up thanks to demographic trends and rising wealth. Smart cities are also driving the sector since they require the backbone of a highly functional and heavily invested data centre platform to succeed.

This growing demand, coupled with the high level of expertise needed to operate data centre assets, presents numerous opportunities from an investment perspective. For instance, a successful new operator stands a high chance of being acquired by a large global data-centre operator in the medium term. Even if the operator is unsuccessful, but has a facility that matches key criteria, it’s still very likely that other data centre operators will compete to take over the business.

As Industry 4.0 and IoT march inexorably onwards, investment opportunities in the data-centre sector will abound; but to be successful, investors must develop a high level of comfort with the asset class. Investing in this sector requires flexibility, in-depth knowledge and a global perspective. Given the constantly evolving nature of the data-centre industry, this is the only way to ensure that your investment strategy will work.

Author: Tom Duncan, Executive Director, Data Center Solutions, Advisory & Transaction Services, APAC, CBRE

Tom has over nine years' experience in all commercial aspects of the data center asset class. He specialises in the strategic management of global data center portfolios and the transaction management of complex acquisitions in global markets, with a particular focus on the Asia-Pacific region.

Responsible for managing and leading Data Center Solutions account and transaction teams, Tom has brokered over 150 acquisitions across more than 40 countries globally. He is CBRE's subject matter expert on data center solutions, and is a leading expert in structuring high-value, complex data center transactions in alignment with business-critical milestones.

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