Off-market deals dominate transactions in the data centre market, as top European cities struggle with shrinking availability of land and power.
Appetite for data centres is exploding globally and investors in Europe are seeking a slice of a market that is experiencing a major surge in demand – partly because of the Covid-19 pandemic which is accelerating take-up of cloud-based IT services by firms in the professional services sector.
‘The main thing in the data centre market right now is that everyone is chasing clouds because cloud storage – which means a data centre – is lower cost in the short term and everyone now is under pressure to cut costs because of Covid-19,’ says an agent in the market. ‘For the first time we are seeing financial institutions migrate on to public cloud which they weren’t able to do until recently because of security concerns.’
New research by global property advisor Knight Frank predicts the European date centre market will mature and grow by 10% next year, on the back of a ‘monumental’ first half of this year during which €26 bn was invested in data centres.
Meanwhile, CBRE forecasts Europe’s leading hotspots of demand – Frankfurt, London, Amsterdam, Paris (collectively known as the FLAP cities) – will add 200 mega-watts (MW) of power for crunching and housing data by the end of this year, while coming under pressure from challenger cities such as Madrid, Warsaw and Dublin.
Conditions are making themselves felt in the market. Cushman & Wakefield is in the process of selling two schemes in London for a yield in the range of 4.5% and a target price of £6 mln (€6.6 mln) an acre, when underlying land prices are half that value.
Shrouded in secrecy
Assets currently on the market include a portfolio in the UK with an eye-catching price tag of up to £2 bn (€2.2 bn), which is up for sale by a well-known wholesale operator. Further details on locations and the size of the assets in this portfolio are currently shrouded in secretive non-disclosure agreements, due to data centres being assigned critical infrastructure status.
According to those with knowledge of this deal, a guide to the potential yield could be that buyers are paying more than twenty times the EBITDA for similar properties.
Elsewhere, CBRE is in the process of advising on the sale of a portfolio of 11 assets situated across Europe, for a price in the region of £580 mln (€639 mln). Triple net leased buildings comprise the majority of the portfolio and the likely buyer looks set to be a ‘lay’ investor who wants to deploy capital from the investment market.
But this is a real rarity on the continent. As of late October, there was not a single investment asset on the data centre market in mainland Europe aside from this, say agents in the segment. Off-market deals comprise the bulk of activity.
‘The perennial question I get from investors is: “what can I buy?” But there isn’t anything,’ an agent tells PropertyEU. ‘That’s the challenge the industry has. There isn’t a market in data centres like in other asset classes because assets don’t get traded and recirculated. When owners are spending many millions on fitting out the infrastructure, buying the freehold real estate is a bit of a drop in the ocean.’
One of the reasons for this is likely to be the costs involved. A rule of thumb is that an average sized data centre features 40 MW of power and the cost of developing it is around £8 mln (€8.8 bn) per MW. Figures like these impose their own high barrier to entry for many in the investor community.
A rare case of an asset coming to market in the near future is a data centre in Amsterdam that is fully leased and comes with strong covenants. The yield being targeted is in the sub 4% range and this deal is expected to close within the next 12 months.
Meanwhile, Knight Frank is currently advising on the sale of eight development sites in the UK’s capital city, with 600 MW capacity. Locations reportedly include the hotspots of Hayes and North Acton in the west and the financial district of London Docklands. Appetite is said to be high among potential bidders, who are all colocation providers. The sellers are a mix of private equity funds and private investors. It is understood the internal rate of return could be higher than 15%.
Up to 80% of demand for data centres comes from hyperscale platforms, such as the US giants Google, Facebook and Apple. Last month, Google announced it has acquired a 133,546 m2 site in Hertfordshire close to London, which is set to house the company’s first data centre in the UK.
Also in the English capital during October, a former car showroom was snapped up by Ark Data Centres under advice from Cushman & Wakefield, which plans to convert the site sold by French car maker Renault and that comprises 8,550 m2, into a data centre by 2022.
As usual in the secretive world of data centre deals, financial details were not disclosed. It was the third site in London purchased by Ark, which also has a joint venture with the UK government to provide cloud hosting services.
Also recently In Austria, Interxion – a subsidiary of Digital Realty, purchased a 22,000 m2 site in Vienna for a new data centre sporting 40 MW capacity. Earlier this year, Interxion acquired land in Madrid, Spain, and also in Frankfurt, Germany – the leading hotspot in Europe for data centes.
The company is now in the process of tying up a deal to acquire a 107,000 m2 site in the city, as part of plans to add 180 MW extra capacity to its campus of data centres. Formerly known as the ‘Neckermann’ site, the transaction with Sun Capital Partners is expected to close in the early months of next year.
This year has seen disruption at the top of the European data centre segment, as the FLAP cities come under pressure from challengers, whose demand for IT power is predicted to exceed 1,000 MW within the next three years, as the FLAP group struggle with issues of space and power supply.
Madrid has seen its megawatt capacity jump on the back of a development by the e-commerce giant, Amazon. Its Amazon Web Services (AWS) platform – digital infrastructure that underpins the online presence and activity of a swathe of critical public and private organisations globally – recently installed 300 MW in the city. Elsewhere, in the north of Europe, Copenhagen in Demark has also attracted developments by Facebook, Apple and Google.