The most important infrastructures of the last century were roads, rails, bridges, air- and seaports. The most important infrastructures of this century, due to increasing digitization in all fields, are cellular towers, terrestrial and subsea fibre as well as data centers to host the servers, which store and process the generated data. While the worldwide generated data was 33 Zettabyte in 2018 it is expected to grow to up to 175 Zettabyte in 2022, requiring extensive additional data infrastructure to transmit and store this data, including more data center capacity.
From an investment perspective, data centers used to be a niche but are now attracting increasing notice as an asset class. With more and more enterprises outsourcing their technical infrastructure and business models and consumers moving into the cloud, the demand is increasing exponentially and likely to continue that way in the coming years.
A lot of data center infrastructure is located close to the largest European internet exchange points, i.e. Frankfurt (the world largest IXP), London, Amsterdam, Zurich, Stockholm and Madrid. Other increasingly important areas include Warsaw, Praha and Budapest (as important hubs for CEE), and Romania (serving the Balkans). Marseille (and Athens) are important locations to serve data center demand in Northern Africa.
There has also been considerable data center growth in other areas of Europe, e.g. close to carbon free energy resources or in areas with perfect climate conditions to run data centers. Especially Nordic areas like Sweden, Norway and Finland can supply a lot of renewable energy and at the same time have a colder climate, which decreases cooling costs.
About 25% of the data center market generated revenue (around 316 Billion US$ worldwide in 2021) is attributable to Europe.
Over the last couple of years we already saw a certain level of consolidation and internationalization in the European data center market. Important players include e.g. Equinix, Interxion/Digital Realty, NTT, CenturyLink/Cyxtera, Orange Business Services, Global Switch, GTT/Interoute and Telehouse. Equinix, Interxion/Digital Realty & Global Data Centers (NTT Ltd) account for an increasing market share in the largest European data center markets focusing on Frankfurt, London, Amsterdam and Paris (FLAP), but also on secondary markets including Berlin, Marseille and Manchester. In 2020, only six data center providers accounted for 78 percent of the total space in Frankfurt, in Amsterdam five accounted for 76 percent, indicating an already rather consolidated market.
Consolidation is not only a key driver for cost reduction – in 2020 it was the U.S. leading cost reduction method – but also the result of an increasing demand for a hybrid infrastructure that is capable of using private and public clouds, but also colocations, i.e. outsourced data centers, leading to the closure of data centers that were not designed for cloud use.
However, we still see new data center providers being launched, classic power providers and other companies expanding into the data center market and partnering with other players in the market, especially in relation to emerging markets to spread the cost and risk of large hyperscale data centers investments.
Despite increasing interest also from an investment perspective, the data center investment market in Europe is still in its early stages and appears to provide loads of opportunities for investors. A direct acquisition or development investment into a data center asset let to a hyperscaler generates high and stable rental income over a considerable term. The same applies to an investment by way of a share interest.
We believe that in the current stage of this not very mature European market the high productivity of data centers and the battle for properties with sufficient energy supply in relevant locations will lead to an increase in rents but an even higher increase in purchase prices: This translates into yield compression along the timeline. Therefore, it is a significant opportunity to pick up and engage in these investments now and profit from yield compression based on the currently low but also increasing interest rates for loans financing such transactions.