Any sector that outperforms an index by almost 40 percent is going to attract big attention. So it proved last month as $25 billion of data centres changed hands in two blockbuster REIT transactions announced on the same day.
On 15 November, New York private heavyweights KKR and Global Infrastructure Partners announced they were taking private Dallas-based REIT CyrusOne in a $15 billion deal, while Boston-based communications REIT American Tower Corporation announced it was acquiring Denver-located REIT CoreSite Realty Corporation for $10 billion.
The value of the two deals combined demonstrates the exponential investment volume growth in digital real estate, almost matching the entire $31 billion traded in the US last year, according to broker CBRE research.
As the sector’s biggest M&A deal to date, the KKR-GIP transaction heavily contributes to its already moving tectonic plates with regard to capital market dynamics too. Once primarily a stomping ground for REITs with market capitalisations bigger than most of the constituents of the US Open-End Diversified Core Equity Index, the privatisation of CyrusOne does much to level the playing field between public and private data centre ownership.
The two deals, expected to close between year-end and Q2 next year, also blow the listed playing field wide open. They leave it with just two mega-managers: Equinix and Digital Realty Corporation. At market capitalisations of $72 billion and $46 billion, respectively, they are currently more relevant to private institutional money for prospective partnerships than acquisitions.
Moreover, they leave ample space for well-orchestrated private strategies to culminate in future flotations. KKR joins Blackstone, which acquired QTS Realty for about $10 billion last year, among others in the US aiming to create scalable, institutional-grade data centre offerings. With a dearth of pure-play data centre options for equities capital currently, they must regard America’s stock markets as viable exits later down the line.
Private digital offerings are also emerging elsewhere in the world. Last month, Hong Kong-based manager PAG Real Estate announced plans to take the organic route with the launch of FLOW Digital Infrastructure, aiming to join peers like GLP and Gaw Capital Partners in taking early market share in a region that saw $1.8 billion of digital assets trade hands in H1 this year. That is small fry relative to the US, but already represents 80 percent of last year’s Asia volume, itself a five-year volume high, CBRE reported in different research.
But not everyone is bullish. At affiliate title PERE’s Asia Summit last month, senior executives at investor Ivanhoé Cambridge and manager LaSalle Investment Management expressed reservations about the sector, highlighting residual concerns about its operational intensity and, increasingly relevant, the inevitable surge in energy required to facilitate today’s growing demand.
Broker Cushman & Wakefield echoed these concerns. The firm revealed in a report last month how 3-4GW of data centre space is under construction at any given time, which is raising concerns about how the market will provide the necessary power for the resultant server use and water for cooling.
This worry will have to reconcile with surging demand from both users and investors. In broker JLL’s 2021 H1 Data Center Outlook report, spend on public cloud services is projected to grow by 8.4 percent in 2021 to a record $4.1 trillion.
Meanwhile, digital REITs produced a return of 19.2 percent last year, CBRE reported, compared with a global REIT return of -16.7 percent. Even this year, as the world adjusted to the impacts of covid-19, the sector produced more than 11 percent, more comparable with other sectors, but attractive nonetheless.
Performance and demand mix for a powerful cocktail. Throw in the necessary substantial innovation to allay today’s sustainability fears and the outcome will be more than palatable for an institutional marketplace desperate to grow this asset class and at pace.