Data centres have reached the top of many investor’s ‘most wanted’ lists as the facilities proliferate at a rate of knots. CBRE’s most recent report on the sector reveals interest in the asset class has inched ahead of logistics and industrial, with soaring demand resulting in a 29% jump since 2018 in investors targeting the sector.
Among chief drivers of the data centre boom is the enormous shift to remote working since covid-19 and subsequent need for cloud computing. Now as the world emerges from the pandemic, the seemingly unstoppable reliance on technology looks to ensure this boom continues: leading market intelligence provider, the US-based International Data Corporation (IDC), estimates worldwide data traffic to grow 61% by 2025. According to CBRE’s report Capturing the Cloud, investors in Australia poured $3.8 billion into the asset class over the previous year while globally the figure was closer to $13 billion.
For the uninitiated, a data centre is simply a facility built to house an organisation’s computer systems - the servers, storage devices and routers it uses to store critical applications and data. In the past organisations typically stored their own data on site, but as computing has grown in complexity so has the search for specialised data storage facilities providing high levels of security, power resources, equipment and the like. It is now commonplace for businesses to have their IT systems in a separate location where they can be managed by skilled third-party specialist operators.
Challenges On New Frontier
While data centres present great opportunity for investors they are also “uncharted territory” according to CBRE’s analysts. The market has yet to see a full market cycle which means investors still lack sufficient comparable deals to benchmark future purchases. Valuations will also be tricky until the sector matures, the report states.
Other challenges include the sheer expense and complexity of data centre construction. The facilities generally require bespoke fit-outs and climate-controlled interiors. This need for cool yet energy-efficient premises has made Australia more attractive for data centre development than warmer Asia Pacific nations, the report notes, with “more and more developers choosing to locate data centres in areas with cooler climates. Using free air cooling with sufficient temperature results in mechanical coolers becoming redundant, cutting up to 40% of the capital cost.”
Mitigating data centres’ environmental impacts is also paramount due to high energy requirements and carbon emissions. This has led to a heavy emphasis on sustainability and ESG within the asset class. Renewable energy and construction should be stakeholders’ primary focuses advises CBRE’s valuations manager Darcy Frawley. “Energy costs can make up as much as 70% to 80% of operational costs,” Mr Frawley points out.
Rapidly evolving technology poses another considerable risk for the new investor. Should a data centre’s technology be superseded, the landlord faces additional costs for refurbishing and updating equipment to keep their property attractive for tenants.
Future looking bright
The data centre development spotlight is on Darwin, the Pilbara and the Sunshine Coast as a result of the 1000km of cable laid to link the Australia Singapore Cable (ASC) to the North West Cable System (NWCS) in Port Hedland. This cable system is the final piece of the Darwin-Jakarta-Singapore Cable (DJSC) a $500 million system of high-capacity cables connecting Perth, Darwin, Port Hedland, Christmas Island, Indonesia and Singapore. The Sunshine Coast is the landing location for the Japan-Guam-Australia South Cable System – the first new cable to land on the east coast outside of Sydney.
Data centre checklist
What makes for an optimal data centre location? The CBRE report lists proximity to an organisation’s customer base, access to road networks and airports and availability of a commercial and reliable power grid as imperatives. Data centres developments also need to be located in or near populous areas to provide skilled labour.
A number of new data centre start up groups are investing in new infrastructure this year and helping drive supply. CBRE’s report cites figures from IBIS showing new data centre businesses rose by 6.8 % between 2016 and 2021 while the number of new businesses is expected to grow by 4.5 % by 2026.
Among significant developments underway is Stockland’s M_Park, a seven hectare technology and innovation precinct to be one of the largest in Australia. Ideally located in Sydney’s Macquarie Park, a densely populated urban hub, the precinct will feature a five-storey data centre named Athena which will operate all hours and create hundreds of jobs.