Investment risks and returns in the data center market – DatacenterDynamics

Mike West is CEO at Digital Infrastructure Advisors Ltd (Dial)
With data centers booming, what opportunities and risks does this create for the investment community?
With the digital economy already accounting for seven percent of the UK’s GDP and the estimated spend on the Internet of Things (IoT) being in excess of £20bn in 2021 it is clear that the data center market in the UK and around Europe is on a long-term upward trend.
I have been in the industry since the late 90s, building data centers for public and private companies, and more recently large scale cloud campuses. I aim to help investors make the right decisions and profit from the huge opportunities available in the data center market.
Real Estate Investment Trusts are funds that can make money from leasing data centers
There is a great deal of consolidation in the industry and a huge amount of money available to be invested, with potentially massive returns. The challenge for a new investor in this space is where to start and how to maximize the returns. For investors and operators getting the strategy right, particularly at the front end is key
Large scale mergers and acquisitions (M&A’s) tend to include older, established assets alongside the recently developed, more attractive sites. In order to maximize the overall investment these older assets need to be carefully reviewed and the opportunities for modernization, repurposing and future proofing assessed accurately. This is where the long term investment values can rise over time and improve the overall returns.
The cost of land is clearly one of the key considerations for investors, as are sustainability and power issues. For new investors, the cost of land can be prohibitive as well as the competitive nature of acquiring it. This competition is from existing entrants, new investors, and the cloud providers who are land banking, so it is important to note that whilst recent trends have been towards large scale data center projects, there is now the emergence of smaller regional digital centers supporting Edge computing.
There are many small and medium sized facilities in commercial and corporate buildings, along with POP sites that once supported legacy services that are reaching, or are already beyond, the end of their useful lives. These locations are often well suited to Edge computing, another key upward trend in the digital economy.
New technology trends are also an important consideration for investors, constructors and operators. They need to ensure that what they are building is going to be able to adapt to the new technology trends. When you’re looking at designing and deploying facilities, whilst you may not know that a certain technology is going to dominate in the future, you do need to understand how easy it is to repurpose the facility for day one, and what that might look like in the future.
Investors should also consider the availability, sustainability and surety of power. Recent sustained power outages in the North of England would have troubled any local Edge data center. The sustainability challenge is more complex as different countries are adopting differing approaches and legislation – the impact of these differences will be an important factor going forward and will need to be monitored very carefully.
However I firmly believe that the number one issue for anyone involved in the data center industry is cybersecurity. Data is growing exponentially and it’s becoming more and more valuable, and the security of that data is more important than it's ever been. At the moment, organizations aren’t doing enough to mitigate the huge risk that cybersecurity presents. When you consider what intelligence agencies and governments around the world are saying, and what organizations like the World Economic Forum are saying then this is the challenge for society, not just the data center industry.
In conclusion there are opportunities in this sector for all different types of investors, from entry level to investors that already have big investments in commercial real estate. For the latter group they often want to understand what the opportunity is for them to leverage their existing assets and how they can be a part in the digital economy as it continues to grow.
Data Centre Dynamics Ltd (DCD)
& DC Professional Development Limited (DCPRO)
22 York Buildings,
John Adam Street,
London WC2N 6JU

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