Alternative Investment Spotlight: Data Centres

Investing in Data Centres

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Investors looking to diversify their portfolios are increasingly turning to data centres as the solution. As worldwide demand for faster Internet connectivity and more data storage continues to grow, investors are interested in this relatively young asset class. Because they have greater potential for return on investment, data centres are quickly becoming mainstream investments.

Table of Contents - Investing in Data Centres

Part of this growth is due to many large corporations realizing that they have an opportunity to make money from their own under-utilized data centres. They are using a sale-leaseback strategy to offload their real estate and only pay for what they need for their data usage.

The companies selling their data centre real estate are smart to recognize this opportunity because the demand for data centre space remains high. Most companies, particularly in e-commerce, require massive amounts of data to do business. However, they cannot or do not want to manage their complex infrastructure. They’ll continue to pay other companies for cloud services, who in turn need large state-of-the-art facilities to house their servers.

Investors who understand how data centres work and the true potential these facilities offer have an exciting opportunity that promises to grow.

Data centres and real estate

Data centres are facilities that house physical servers and other related equipment, centralizing an organization’s information technology. The servers and equipment are vital to the daily operations of the organization or business.

Data centres are either single-tenant or multi-tenant. Single-tenant or wholesale facilities handle the data for one business that traffics in large amounts of data. Companies like Netflix and Amazon can be found in these enterprise facilities. Because there is only one tenant, these facilities are designed to meet the company’s specific needs. Enterprise facilities are usually safe investments because tenants don’t want to disrupt their services by migrating data centres and will comfortably commit to a long-term lease.

Multi-tenant or retail facilities house servers for many different companies. These companies pay to rent only as many racks of equipment as they need. Because their needs are more of a moving target, they often have flexible lease terms. That flexibility costs them more in rental rates compared to the rates at enterprise facilities. At these colocation facilities, a single-tenant usually won’t occupy more than 5 percent of the facility, so when a tenant leaves there is minimal loss of profit.

The best location for a data centre is a region where power and fibre are readily available. How fast data is transmitted over a network is a key factor in determining where to locate a data centre. Toronto, Montreal and Vancouver are top locations for data centres because they have the infrastructure to handle faster connections.

While data centres are currently clustered around big cities, a recent trend has been for data centres to move closer to end-users. Smaller data centres are now popping up in urban areas. Some cities and local jurisdictions are offering tax incentives to attract data centres. Data centres benefit regions because they generate tax revenue without harming infrastructure.

The best location for a data centre isn’t just about infrastructure. Data centres also need highly skilled workers to monitor and maintain equipment 24/7. A successful data centre is located near a strong talent pool, such as an urban centre or university city.

Design is a crucial component when creating a data centre. The amount of usable space for IT equipment impacts the potential for capacity – and investment opportunity. Complex systems are required to keep the technology within the proper temperature and humidity range. Securing real estate is easy; the infrastructure and design are much harder.

Benefits to investors

Data centres are a hot real estate asset class. They allow investors an excellent opportunity to diversify their portfolios and offer a strong return on investment.

Data centres are attractive to investors because they bring in high-quality tenants. Data centre tenants usually sign leases for at least a decade, offering investors consistent revenue. Some investors have even secured purchasing agreements where they fund the construction of a data centre with a pre-committed tenant ready to lease.

Data centres are crucial not only to tech-heavy companies but also to any business hoping to operate online. This trend will continue to grow, meaning there will be a healthy pool of quality tenants for the foreseeable future.

Unlike other investments, data centres are not tied to traditional economic factors that influence the potential for return on investment. GDP growth, consumer confidence and unemployment don’t impact data centres in the same way. Even if they don’t have a storefront, companies still need their data centres to stay in operation. They are willing to pay a premium to lease these services rather than manage them in-house.

Data centre REITs

It takes a lot of capital and know-how to invest in data centres. Investors are usually professional real estate investment companies. That doesn’t mean that you can’t still get involved in this rapidly growing asset.

With a real estate investment trust (REIT), you can profit from this real estate segment without having to scope out the land and learn all about servers. Instead, you can let the trust administrators do the leg work while you collect the profits.

If you’re looking to invest in a data centre REIT, there are a few popular options:

Summit Industrial Income REIT (TSX: SMU.UN):

Summit is known for their portfolio of industrial properties across the country, but are now building data centres in key Canadian markets. They have partnered with Urbacon, a private company bringing their experience building and managing data centres.

Brookfield Infrastructure Partners (TSX: BIP.UN):

Brookfield owns one of the largest and most diverse infrastructure networks. In early 2019 they acquired AT&T’s data centres and hired Evoque Data Center Solutions to manage the 31 international facilities.

Equinix (NASDAQ: EQIX):

U.S.-based Equinix operates in 52 global markets. It is one of the leading REITs for the data centre asset class.

Data centres are a newer asset class, but they are quickly becoming a mainstream investment. Investors have realized that data centres are solid, well-performing investments for diversifying their portfolios.

Your Guide to Investing in Data Centres and Cloud Services


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Scott Dillingham

Scott Dillingham

I have been investing and lending to real estate investors for nearly 10 years now. After thousands of successful deals between flips, rent to owns, student properties and commercial assets I have developed a deep knowledge of real estate investments and have a passion of sharing this information with the world! If your looking for a lender who specializes in rental property financing you're going to want to connect with me at team@lendcity.ca.