Investor Interest in Data Centers Growing as Real Estate Returns Disappoint

With the return on real estate over the past few years falling substantially, interest has moved to alternative asset classes like data centers. According to the FTSE Nareit US Real Estate Index, returns for US REITs were in the mid-single digits in the last year and almost all of that came from income, not capital gains. Investors looking for better returns are having to look elsewhere to find them.

Royalty Free Photo

Why the Interest in Data Centers?

Data Centers are an emerging asset class in most investors’ minds because they are newer than office buildings, shopping malls, or industrial warehouses. The tenants tend to be large corporations that don’t have a problem paying their bills, so there’s little for data center companies to worry about with chasing up rent arrears.

A younger breed of investors has shown interest in buying into data centers. New bonds issued by real estate companies to deepen their investment in this emerging asset class pay a livable income stream until the bond is repaid. Backed by the value of the underlying property, this feels safe to buy into for income. Companies like Viderium are developing and buying data centers and raising bond money in this way to catch the wave of interest in the cloud.

On a broader level, the rapid growth of the industry makes data centers an attractive investment. For instance, per a report by real estate and investment services company CBRE, global investments in data centers reached $20 billion in 2017, up from $7.7 billion in 2016. As the amount of data the world consumes increases exponentially, data centers will increase to store it. As such, investments in data centers have the potential for high returns.

How Do Data Centers Fit into a Diversified Portfolio?

While data centers are termed“technical real estate” in some circles, they’re essentially just another type of property investment. Instead of buying office buildings and filling them with tenants, data centers are situated near high-connectivity areas of town with ample access to power, space to fit diesel-based backup power generators, and access to a talented local workforce.

Investors are attracted to the income stream and some appreciate that it takes them away from investing in shopping malls and offices which are both under threat from co-working, outsourcing and online shopping.

What Type of Customers Rent Space in Data Centers?

It doesn’t seem to matter whether the data center is based in the US, Europe, the UK, or Asia. Being near where the customer is accessing the cloud encourages corporations to pay for access in regionally distributed data centers around the world. The nearer the internet user is to the data center, the faster their access is; everything else being equal.

You might think that the likes of Google, Facebook, Microsoft, and other major corporations own all their data centers, but that’s not true. They are some of the largest ‘tenants’ on the books of data centers renting out racks of servers to deliver the services their customers require. It’s usually not a mom ‘n’ pop operation. This is because while Microsoft may rent the server space, they charge their end customers for Microsoft Azure and other services. So, the tenants for the data center are usually the largest companies in the tech space that are using the cloud in a big way.

When there is space in your investment portfolio for something a little different, then data centers are an interesting choice worth considering carefully.