Data centres are a growing asset class within REITs. Find out which are the REITs to consider when investing in data centres.
Yeo Hui Shi Published on 02 Jun 2021
Photo by Tanner on Unsplash
- Data centres are an important component of the digital economy. Its demand is underpinned by the increasing adoption of cloud-based services as well as the shift towards 5G.
- Favourable demand and supply dynamics are expected to continue to drive up rental rates of data centres in Singapore. Meanwhile, China is a market with plenty of growth potential.
- Our recommended REIT to gain some exposure to data centres is Ascendas REIT (SGX:A17U), Its diversified portfolio of asset classes including data centres and logistics properties are positioned to ride on the key trends of the post-COVID economy.
Data centres may not be the fanciest real estate asset class out there. Inside its dull and rectangular exterior, they are packed with very noisy equipment such as servers, routers and air conditioning.
Nonetheless, data centres are a growing asset class within the REITs space. In recent times, there has been a trend of REITs either acquiring data centres or planning to acquire data centres (Table 1). This is a considerable step away from the usual tall office skyscrapers or large retail malls that many REITs like to acquire.
Table 1: Increasing presence of data centres in REITs over the last 12 months
|Date||Name of REIT||Ticker Code||Description|
|13 Jul 2020||Cromwell European REIT||CWBU||Entered into agreement with Stratus Data Centres to co-invest 50% stakes into two DC projects in Europe|
|1 Sep 2020||Mapletree Industrial Trust||ME8U||Completed the acquisition of remaining 60% interest in 14 US DCs|
|30 Sep 2020||CapitaLand China Trust||AU8U||Expanded investment mandate to cover DCs|
|13 Mar 2021||Mapletree Industrial Trust||ME8U||Completed the acquisition of DC in Virginia|
|17 Mar 2021||Ascendas REIT||A17U||Completed the acquisition of 11 DCs in Europe|
|20 May 2021||Mapletree Industrial Trust||ME8U||Proposed acquisition of 29 US DCs|
|Source: Companies, iFAST Compilations|
Data centres are an important part of the digital economy
There is a good reason why an increasing number of REITs are moving towards data centres. In this increasingly digitalised world that we live in today, the importance of data centres cannot be understated. Data centres are an important component of the digital economy – they house core IT equipment required to collect, store, process, and distribute large amounts of data.
With the increasing adoption of cloud-based services as well as the shift towards 5G, data traffic is expected to grow rapidly, consequently leading to increasing spending on data centres. We believe this underpins the growing demand for data centres going forward.
The leases of data centres are typically long (can go up to 10 years) relative to other asset classes such as retail and office. Data centre leases often come with built-in rental escalations, which is not common in Singapore-focused commercial REITs. For instance, the portfolio of 29 US data centres that Mapletree Industrial Trust (SGX:ME8U) proposed to acquire has a weighted average lease expiry (WALE) of 7.9 years and a rental escalation of 1.5% to 3.0% per annum (for 89.4% of leases).
Hence, acquisitions of data centres can enhance the income stability of REITs as well as provide organic growth visibility. We believe this would translate into sustainable DPU for investors.
Attractive data centre markets
As one of the hottest real estate asset class, the global data centre market has been seeing continued growth. There are, however, some geographical markets that are more attractive than others.
In Cushman & Wakefield’s Data Center Global Market Comparison 2021 report, data centre markets around the world are ranked based on several factors. Factors that have been assigned the highest weightages during the scoring are cloud availability, fiber connectivity, and market size.
Cloud availability: This is determined by the access to the three major global cloud services which are Amazon Web Services, Microsoft Azure, and Google Cloud.
Fiber connectivity: The greater the number of fibre networks, the better connected the data centre is to distribute information at increased speed.
Market size: Large markets lead to increasingly scalable ecosystems across an ever-growing number of building expansions, networks, and software options.
Based on the methodology used by Cushman & Wakefield, the top data centre markets are as follows:
– Northern Virgina / Chicago / Silicon Valley / Dallas / Seattle / New York, US
– Sydney, Australia
– London, UK
– Amsterdam, The Netherlands
A market worth highlighting from the above is Singapore. The local market is highly sought-after by data centre operators. Over the past five years, there has been a rapid increase in the number of data centres being approved to be constructed on industrial state land.
However, due to land scarcity, Singapore is likely to face a constraint in supply of data centres. The government has temporarily paused the release of state land for data centres, as well as the development of data centres on existing state land. These favourable demand and supply dynamics are expected to continue to drive up rental rates of data centres in Singapore.
Meanwhile, one market that did not make the cut into Cushman & Wakefield’s top markets list is China. This is possibly due to the exclusion of Alibaba Cloud – China’s largest cloud service provider – in Cushman & Wakefield’s selection methodology. However, we think China deserves a mention as it is a market with plenty of growth potential.
Even though China’s data centre market is expected to double in size over the next five years, it is still underdeveloped as compared to the US (Figure 1). Moreover, unlike the US, China’s cloud computing industry is still in a nascent stage. Currently the fourth largest cloud service provider in the world, Alibaba Cloud could potentially rival other big players such as Amazon and Microsoft. As the cloud market expands, it could open up more opportunities for data centre operators.