Data has become the highly coveted commodity of our time. It needs to be collected, stored, and processed, making data centres indispensable. The demand for data centers is currently growing rapidly. With the backdrop of changing work environments due to the Covid-19 pandemic (remote work, more video conferences) and the emergence of generative artificial intelligence (AI), data volumes are growing exponentially. According to forecasts, consumers and businesses will generate twice as much data in the next five years as they have in the past ten.

Global storage capacity is expected to grow by 15.2% annually over the next five years, according to a forecast by Structure Research. Accordingly, data centres are being built to increasingly powerful specifications. Ten years ago, IT connection capacity was often less than 10 megawatts (MW). Today, some developers are already planning data centers with over 100 MW.

So far, such computing power has primarily been installed in capital cities. An exception is Frankfurt, the main banking location in Germany, where the largest data capacities in continental Europe have been set up. The most important location factors are reliable power supply, high-performance fibre optic connections, and easily accessible land in a (natural) disaster-free environment.

Energy consumption is very high. According to estimates, German data centres will consume nearly 20 billion kilowatt-hours (kWh) this year. As part of the energy transition, savings will have to be made in this area.

Available power supply is the main bottleneck factor in Frankfurt. It is projected that by 2030, no additional capacity will be available, as existing capacity is already fully allocated. While power grid operators are massively expanding their supply, this is also needed for the expansion of e-mobility, and increased use of heat pumps.

PGIM Real Estate, for example, recently acquired a site for the development of a data centre near Munich, explicitly mentioning that the short term development potential in Frankfurt is limited. The key feature in Munich is the provision of a total power supply of 30 megavolt-amperes (MVA), which was secured during the purchasing process.

In Berlin, the second largest data centre location in Germany, power capacity is also considered tight, although not as much as in Frankfurt. In the outskirts of Berlin, power is still available, not least due to the many wind farms in Brandenburg.

However, an easing of the location issue is emerging for AI data centres. For AI applications, proximity to data nodes with correspondingly low latency is no longer necessarily required. Open applications like ChatGPT can be used by anyone, so they are not protected. Companies that want to use AI exclusively, rely on closed systems. For their own AI, they need more decentralised computing power, because fast response times are only ensured by data centres that are physically close.

Microsoft, for instance, announced in February of this year that it plans to invest 3.2 billion euros in expanding its AI infrastructure and cloud capacities in Frankfurt and North Rhine-Westphalia over the next two years. This would make NRW the third largest market after Frankfurt and Berlin.

This growth is also fuelled by data protection legislation. In the EU, the General Data Protection Regulation (GDPR) applies. Since GDPR no longer applies in the UK post-Brexit, London as a data centre location has lost some of its attractiveness. Frankfurt, in particular, benefits from this.

The strong growth of data centres is not possible without significant capital. Dominic Thoma, Co-Head of Industrial & Logistics Investment at JLL Germany, estimates the investment volume at 10 to 12 million euros per megawatt (MW). Data centres typically have connection capacities of 10 MW to 50 MW in size. For larger facilities, power capacity and land space in urban areas are generally insufficient, but with timely planning, much larger capacities above 100 MW are possible in the surrounding areas and beyond.

Today, data centres are mostly built at the initiative of data centre operators, who partner with well capitalised specialist players, or private equity firms such as KKR, Blackstone, and Macquarie. For example, in November 2023, a cooperation between Vantage and Meag was announced. The asset management arm of Munich Re invested 2.5 billion euros in a portfolio of six data centers.

Currently, data centres are primarily the focus of infrastructure investors. According to Thoma's observations, their real estate colleagues are just beginning to tap into the market. „Because newly built data centres as classic real estate investment products are not yet widely available on the market“, says the JLL manager. According to the study, properties with data centre relevance totaling approximately 3 billion euros were sold over the past five years, with the trend sharply increasing. Currently, the predominant activity revolves around the acquisition of land and existing properties for repurposing.

The returns seem to be quite attractive. JLL, for example, indicates a net initial yield of approximately 5.5% for a fully fitted new construction (a facility that is fully equipped and operated according to tenant specifications) leased long-term to a hyperscaler (such as Amazon, Microsoft, and Google). Yields on traditional asset classes such as offices, logistics, and residential properties are significantly lower.

For Thoma, it is exciting to see how the market for real estate transactions involving data centres will develop in the coming years. He sees two possibilities. One is that the data centre, primarily developed by the operator, will be occupied with a lease and sold as a classic real estate transaction. These would be sale-and-lease-back real estate transactions, which are also possible as forward deals. Alternatively, it is possible that the platforms of the operators, or their investors, will have no interest in individual property sales, and only want to recapitalise, meaning that private equity firms receive their capital plus a return/profit through the sale of their shares in the operator or platform or through an IPO. „This could be a very likely path“, believes Thoma.

Nonetheless, it will take some time for the direction to become clear. As of now, many data centres are only in the planning or construction phase. „At the moment, there is enough capital from private equity sources or infrastructure funds", says Thoma. "Recapitalisation is therefore not yet necessary.“

In the next three to five years, many data centres are expected to be completed. Since private equity often operates on three to five-year cycles, there will also be increasing recapitalisations, and corresponding opportunities for investors will open up. These are likely to be mainly large firms, open-ended real estate funds, and special funds, as individual investments are frequently over 100 million euros due to the high investment costs.