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Investment risks and returns in the data center market

February 18, 2023

With the digital economy already accounting for 7% of the UK’s GDP and the estimated spend on the Internet of Things (IoT) being in excess of £20bn in 2021, it is clear that the data center market in the UK and around Europe is on a long-term upward trend. This article will look at the opportunities this creates for the investment community and some of the issues they should consider.

I have been in the industry since the late 90s, building data centers for public and private companies, and more recently large scale, cloud campuses. I set up DIAL to help investors make the right decisions and profit from the huge opportunities available in the data center market. This is a challenging, fragmented and complex industry, and so, in addition, I have created the DIAL advisory board which brings together a team of highly regarded subject experts from across all elements of the data center lifecycle in all major geographical regions. Each member of the team is handpicked and, as well as being specialists in their field, they are also successful and established business people in their own right.

There is a great deal of consolidation in the industry and a huge amount of money available to be invested, with potentially massive returns. The challenge for a new investor in this space is where to start and how to maximise the returns.

For investors and operators, getting the strategy right, particularly at the front end is key, and we also discuss how they can monetise ideas and how to future proof the overall investment.

Large scale mergers and acquisitions (M&As) tend to include older, established assets alongside the recently developed, more attractive sites. In order to maximise the overall investment, these older assets need to be carefully reviewed and the opportunities for modernisation, repurposing and future proofing assessed accurately. This is where the long term investment values can rise over time and improve the overall returns.

The cost of land is clearly one of the key considerations for investors, as are sustainability and power issues. For new investors, the cost of land can be prohibitive as well as the competitive nature of acquiring it. This competition is from existing entrants, new investors and the cloud providers who are land banking, so it is important to note that whilst recent trends have been towards large scale data center projects, there is now the emergence of smaller regional digital centers supporting Edge computing.

There are many small and medium sized facilities in commercial and corporate buildings, along with POP sites that once supported legacy services that are reaching, or are already beyond, the end of their useful lives, and these locations are often well suited to Edge computing, another key upward trend in the digital economy.

DIAL is able to bridge the gap between commercial and technical real estate and distributed computing to create innovative technical and funding solutions for these new regional initiatives, providing investors with more opportunities and a broader range of initial funding levels.

New technology trends are also an important consideration for investors, constructors and operators. They need to ensure that what they are building is going to be able to adapt to the new technology trends. When you’re looking at designing and deploying facilities, whilst you may not know that a certain technology is going to dominate in the future, you do need to understand how easy it is to repurpose the facility for day one, and what that might look like in the future.

Investors should also consider the availability, sustainability and surety of power. The recent long term power outages in the north of England would have troubled any local Edge data center . The sustainability challenge is more complex as different countries are adopting differing approaches and legislation – the impact of these differences will be an important factor going forward and will need to be monitored very carefully.

However I firmly believe that the number one issue for anyone involved in the data center industry is cybersecurity. Data is growing exponentially and it’s becoming more and more valuable, and the security of that data is more important than it’s ever been. At the moment, organisations aren’t doing enough to mitigate the huge risk that cybersecurity presents. When you consider what intelligence agencies and governments around the world are saying, and what organisations like the World Economic Forum are saying, then this is the challenge for society, not just the data center industry.

In conclusion there are opportunities in this sector for all different types of investors, from entry level to investors that already have big investments in commercial real estate. For the latter group they often want to understand what the opportunity is for them to leverage their existing assets and how they can be a part in the digital economy as it continues to grow. We are here to help.

Mike West

CEO at Digital Infrastructure Advisors Ltd (DIAL)