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Playing defence: Investors looking to data centres

Surging online demand has boosted the resilience of data centres as an investment

June 10, 2020

With the global economy under pressure, real estate investors are hunting for defensive strategies that are more likely to see them safely through the downturn.

Data centres – buildings responsible for channelling our increasingly online lives – have crept to the top of that list.

“We’ve seen enhanced real estate investment in the data centre space in recent years, and it’s being accelerated by the ongoing coronavirus pandemic,” says Rohit Hemnani, head of Alternatives, Capital markets, JLL Asia Pacific.

Data centres have been one of the top-performing asset classes in REIT markets around the world since the onset of the pandemic. In the U.S., four of the top 10 best performing REITs throughout the crisis so far (to May 22nd) were data centre REITs.

Widespread lockdowns, social distancing, and home-based working have transitioned many everyday activities from the physical to the digital. This has boosted demand for digital infrastructure, including data centres.

CAPEX spending on hyperscale-enabled data centres totalled over US$120 billion in 2019, and the pandemic will not slow this momentum meaningfully, according to the Synergy Research Group.

The in-house data centres of many corporations are not geared to provide the level of digital support for widespread work from home arrangements, especially in their ability to ensure employees' private and secure network access to corporate networks is maintained,” Hemnani says.

With growing uncertainty over what restrictions will remain, and for how long, the reliance on network support is unlikely to ease in the near-term.

Research house IBISWorld recently upped its 2020 revenue growth forecast for the data storage services industry from 6.1 percent to 12.7 percent, due to increased demand “as businesses shift operations onto the cloud and expand possible working-from-home arrangements to ensure maximum operation during the COVID-19 pandemic."

But for the sector to meet this demand, more investment in the form of land, new development, and redevelopment of existing assets will be crucial.

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In April, Alibaba Cloud announced plans to invest over US$28 billion in cloud infrastructure and the construction of data centres over the next three years to help digital transformation efforts in the post-COVID-19 economy.

“While a heavily infrastructure-based industry, with fibre networks and processors, a robust data centre sector cannot exist without access to land, real assets, and experience with building,” says Hemnani. “It might present as high tech on the surface, but to many investors, data centres is also a real estate play that will increasingly provide solid defence in a time of change and uncertainty.”

A booming market in Asia Pacific

While growth is being seen worldwide, Asia Pacific is set to be the fastest-growing region for data centres, according to Cisco’s Global Cloud Index: Forecast and Methodology. The report predicts that the region will house 47 percent of global data servers by the end of 2020.

Data centre provider Equinix, a global leader in the sector, forecasts that cloud and IT services in Asia Pacific will grow at a compound annual rate of 50 percent through 2022, dwarfing other regions.

Pre-coronavirus, many of the region’s most prominent investors and real estate firms had deployed billions into data centres in response to the roll-out of 5G and cloud computing boom, with quicker downloads and greater efficiencies requiring a new set of technologies and spurring development of data centres. Across Asia Pacific, primary markets include Singapore, Hong Kong, Sydney and Tokyo, and high growth markets include India, China, and Jakarta.

Singapore’s sovereign wealth fund, GIC, is an established player in data centres in Asia Pacific and Europe. Earlier this year, it announced the establishment of a joint venture worth more than US$1 billion in Japan with Equinix, which has a network of 210 data centres globally.

“As a long-term value investor, we are confident that the strong growth in data consumption and public cloud data storage will continue to drive secular demand for hyperscale data centres,” said Lee Kok Sun, Chief Investment Officer, GIC Real Estate, in a release at the time.

Last year, Australia-based property and infrastructure group Lendlease partnered with an unnamed institution to invest US$1 billion in data centres across the region.

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In China, the first country impacted by COVID-19, policymakers recently announced a commitment to constructing new digital infrastructure networks, including data centres, 5G and artificial intelligence, to support the new and post-COVID-19 economy. The motivation rests in aligning data processing closer to the end-user to reduce latency and improve user experience, which will form the foundation of a national 5G network.

“Demand for modern data centres is as strong as we’ve ever seen,” says Hemnani. “For developers especially, there’s a realization that real estate is going to be part of 5G’s backbone.”