In the latest loan deal to be provided through its £929 million (€1.05 billion) partnership capital fund, London-based alternative lender ICG-Longbow opted to back a niche property type viewed by many as a growth prospect: data centres.
Through its UK Real Estate Debt Investments V vehicle, the lender provided an initial £25 million of funding to colocation data centre provider Proximity Data Centres to finance the development in the London area of ‘edge’ data centres – relatively small-scale facilities that extend data networks to end-users.
As Europe’s real estate lenders have increasingly explored alternative and operational property types in recent years, financing options for data centre owners have expanded. Many in the real estate industry expect huge growth in the sector. In the Urban Land Institute’s and PwC’s 2020 Emerging Trends Europe survey, respondents ranked data centres eighth in a list of 25 sector prospects.
Market participants also believe the current period of covid-19 lockdown could have a long-term impact on working patterns, with a resulting increase in internet usage and demand for more data centre capacity.
ICG-Longbow’s deal was agreed before the escalation of the coronavirus crisis. Martin Wheeler, co-head of ICG Longbow, told Real Estate Capital that the firm has been lending against data centres since 2014. “We understand how the market works in the UK – where demand is coming from, where supply is coming from,” Wheeler explained.
John Hall, managing director of Proximity Data Centres, added: “The demand for this data centre space is being driven by the continually increasing requirements for data to be located close to the user, with key markets being media streaming providers, cloud service providers for business and consumers, and regionally-located disaster recovery data centre facilities in the finance sector.”
Erenik Yzeiraj, a senior investment advisor at Geneva-based venture capital and private equity firm LIAN Group, which invests in data centre real estate, believes the covid-19 pandemic will have a huge impact on the sector.
“With companies being forced to test [remote working] now, this trend, and therefore data and internet usage, will increase in the future,” he said. “Tech infrastructure, network and data centre companies will adapt to the situation by increasing their capacity and efficiency.”
As demand increases, Yzeiraj expects the data centre market to mature and attract more investors. “This will drive more competitive pricing, more large institutional players into the space and more comfortable financing terms.”
While covid-19 lockdowns will stall the development of new stock, potentially slowing the data centre sector’s rapid growth, market participants believe the crisis will lead to medium- and long-term growth for the industry.
“Everyone is so reliant on technology, and data centres are driving all this tech,” said Paul Mortlock, head of EMEA data centre capital markets at property consultancy CBRE. “This crisis has highlighted the importance of this infrastructure. Data centres have proved to be a very robust asset class, and the operators have not to date seen a major impact from covid-19 on their business and their revenues.”
Mortlock added that lenders are also increasingly convinced by data centres’ fundamentals. “Historically, there was a pretty small list of lenders but new entrants are recognising the amount of growth in the sector and we see a lot of different types of new lenders coming to the market. Commercial banks, high street banks, investment banks, insurance companies are all keen to lend, all of which have a strong appetite for exposure to the sector.”