Using specialty financing to tap into the UK’s data center boom
15 October 2024
When you think of investment opportunities stemming from the emergence of new technologies like generative AI – along with the proliferation of cloud computing, big data analytics and connected devices – real estate is probably not what immediately comes to mind. But given that the advance of technology will drive a massive increase in demand for data storage and processing, Moody’s projects a doubling in global data center capacity over the next five years.[1] This will require more land to not only build the data centers themselves, but also the infrastructure needed to support the power-hungry facilities.
The coming boom in data center capacity will be concentrated in certain countries and regions. The UK, and Greater London specifically, are likely to be among them.
The UK hosts the largest number of data centers in Western Europe, generating an estimated £4.6 billion in annual revenue,[2] and is a key hub for connectivity worldwide. Moreover, with data center permits in Dublin and Germany currently on hold owing to concerns over high power consumption,[3] industrial and urban warehousing property developers have been capitalizing on the opportunity to widen the UK’s lead as the region’s No. 1 data center hub.
Unlike governments elsewhere in Europe, the new Labour government has pledged to make it easier to build data centres in the UK.[4] In September, it designated the country’s data centers as ‘Critical National Infrastructure’. This marks the first Critical National Infrastructure (CNI) designation since the Space and Defense sectors gained the same status in 2015, and should help overcome objections by local councils that might otherwise stall data center projects across the country.
And so, in contrast to the slump in the overall property market over the past three years, data center real estate deals have been booming in the UK.[5]
Microsoft,[6] Amazon[7] and Google[8] are building several large-scale data centers across the UK involving billions of dollars of investment.
Power bottleneck
The biggest issue now is availability of power. Considering that an average ChatGPT query needs nearly 10 times as much electricity to process as a Google search,[9] our data-related power demands are set to explode.
Morgan Stanley analysts estimate that data centers will account for 4% of power demand by 2035, up from 1% today.[10] In the UK, National Grid Chief Executive John Pettigrew recently said that power use by data centers would increase six-fold in the next decade,[11] warning that the grid was becoming “constrained” and that “bold action” was needed to create a network able to cope with “dramatically” growing demand.
This issue is compounded by the fact that nearly 80% of the UK’s data center capacity is concentrated in or near London, with clusters in Slough, the City and the Docklands (see Figure 1). This is because data center operators typically look for sites near their biggest customers to reduce latency, or the amount of time it takes for data to move from one point to another.
Figure 1: Most of the UK’s data center capacity is in London
Source: S&P Global Market Intelligence 451 Research
After all, although London is perhaps best known as a global financial center, it is also one of the most technologically advanced communities in Europe in terms of adoption of cloud and new technologies, and also a hub for software, internet of things (IoT) and AI development.
So, while the North of England and Scotland are well-positioned to host sustainable large-scale data centers, with access to renewable energy sources and cooler climates that reduce the need for energy-intensive cooling systems, data center developers will continue wanting to locate facilities in the South of the country because that’s where the users are. Furthermore, growing demand for smart devices that rely on edge computing could increasingly drive demand for smaller edge data centers in or near urban centers.
This could translate into a windfall for landlords in space-constrained London, who will have opportunities not only to sell or lease land to big companies – such as cloud vendors, banks or telcos – to own and operate their own data centers, but also from the spread of co-location facilities. A co-location center is essentially a data center that rents out space to third parties to host their own servers and usually provides access to network capacity and power, as well as cooling equipment.
Data centers, and co-location facilities especially, have attracted the interest of investors in recent years because of their steady, utility-like cash flows and high risk-adjusted yields.[12] Private equity investors have accounted for a major share of those deals.
Other data center-driven opportunities
In addition to real estate, the UK’s growing data center economy is likely to drive demand in four adjacent areas: sustainable energy; cooling systems; construction services; and computing equipment.[13] In particular, cutting-edge climate technologies could help overcome the power bottleneck.
Developing data centers is a capital-intensive undertaking which requires large up-front investment. According to Moody’s, “the ability to secure funding will be a critical determinant of how quickly and efficiently these data centers can scale.”[14]
Financing from a variety of sources is therefore needed to capitalize on the explosion in demand for data centers, with sources of alternative capital needed to supplement traditional bank lending. Because even though interest rates could be on the way to falling further, banks remain wary of taking on more risk in the current environment.
For investors looking to capitalize on data center-related opportunities, securities-based financing can be a compelling alternative in the current climate, providing a flexible, cost-effective and stable form of capital with no restrictions on the use of funds. Whether investing in private equity vehicles, real estate assets or associated industries, financing from EquitiesFirst allows investors to monetize their long-term shareholdings and unlock the flexible capital they need to take a view on the sector.
[1] https://www.moodys.com/web/en/us/creditview/blog/data-centers-rapid-growth-brings-long-term-risks.html
[2] https://thelens.slaughterandmay.com/post/102jj5n/designating-uk-data-centres-as-critical-national-infrastructurea-new-era-of-gro#:~:text=The%20UK%20hosts%20the%20largest,key%20hub%20for%20connectivity%20worldwide.
[3] https://www.datacenterdynamics.com/en/opinions/data-center-capacity-demand-for-ai-cloud-and-digital-services-pioneers-uk-real-estate-market/
[4] https://www.datacenterknowledge.com/regulations/what-the-new-uk-government-means-for-the-country-s-data-center-sector
[5] https://www.datacenterdynamics.com/en/opinions/data-center-capacity-demand-for-ai-cloud-and-digital-services-pioneers-uk-real-estate-market/
[6] https://sg.news.yahoo.com/microsoft-eyeing-many-more-uk-151439794.html
[7] https://www.wsj.com/tech/ai/amazon-to-invest-10-5-billion-in-u-k-for-cloud-ai-infrastructure-62220fe7
[8] https://www.bloomberg.com/news/articles/2024-01-18/google-to-invest-1-billion-in-new-uk-data-center-to-meet-demand
[9] https://www.goldmansachs.com/insights/articles/AI-poised-to-drive-160-increase-in-power-demand
[10] https://www.reuters.com/breakingviews/data-centre-boom-reveals-ai-hypes-physical-limits-2024-07-04/
[11] https://www.bbc.com/news/technology-68664182
[12] https://www.mckinsey.com/industries/technology-media-and-telecommunications/our-insights/investing-in-the-rising-data-center-economy
[13] https://www.mckinsey.com/industries/technology-media-and-telecommunications/our-insights/investing-in-the-rising-data-center-economy
[14] https://www.moodys.com/web/en/us/creditview/blog/data-centers-rapid-growth-brings-long-term-risks.html
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