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Are data centers a good investment?
Technology investment

Are data centers a good investment?

Tom Walker explains data centres and their increasing prominence as investment vehicles
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25 FEB, 2020

By Tom Walker from Schroders


Data centres are essential components of our modern-day existence, but are they good investments?

In today’s digital world, data centres are becoming an essential part of life. Data centres are where the cloud lives (cloud computing refers to data centres available to many users over the internet) and where all our data, photographs and music is stored. They are a vital component of the global economy, whether you are an individual, a business, a city or a country.

Just as cities thrived in the earliest days of the industrial revolution when they had ready access to coal and steel, the successful cities of the future will be the ones with the best access to data centres.

What are data centres?

Data centres are buildings or groups of buildings used to house computer systems and associated components, such as telecommunications and storage systems. Data centres often include backup components in case of a system failure and various security devices, demonstrating how important IT operations are to modern businesses.

Why are they so important to the success of global cities?

Within the data world, some users cannot tolerate any delay, or latency, to the information that they need. The closer a business is to a data centre, the quicker it will receive the information that it needs. This means that data centres that are close to businesses will have the lowest levels of latency. With businesses increasingly clustering together in cities, this makes city-centre data centres a vital cog in the economy of a global city.

What do data centres need?

As you might expect, specialist skills are required to build and operate data centres. Just as access to steel and coal was so vital in the early days of the industrial revolution, access to talent is essential to the functioning of the modern global city.

Cities with world class universities, such as London or Boston, benefit from a pool of talent already in the city with employment and business opportunities helping to keep those people in the city once they graduate.

Why are data centres so important in China?

China has more than 800 million internet users and the largest number of online gamers (620 million) in the world. The potential growth for data centres in China is huge, with some analysts predicting that the cloud computing market in China will quadruple by 2022.

In addition, internet data volumes are set to quadruple, driven by an increase in gaming, video and e-payments. Gaming, in particular, is driving growth as activity is online, with players taking part from different locations around the world.

To store your data in China, you have two choices. You can either go to a data centre owned by one of the three state-controlled mobile network operators (China Telecom, China Unicom or China Mobile) or put your servers in a carrier-neutral data centre.

The three state-controlled mobile network operators are relatively inflexible; their services tend to be standardised and users cannot easily connect into other carrier networks. By contrast, carrier-neutral providers offers connectivity to multiple carriers and focus more on service quality.

Why should investors care?

Within China, the strongest demand for data centres is from Tier 1 cities (the biggest and economically most important cities), such as Shanghai, Beijing and Shenzhen. These cities sit in what we call “mega city clusters”, large cities relatively close to each other, creating vast trade areas. For example, Shanghai sits in the Yangtze River Delta and has a population of 156 million, while Shenzhen sits in the Pearl River Delta, with a population of 120 million

Although the supply of data centres is abundant in lower tier cities, they generally have lower utilisation rates as bandwidth limitations prevent latency-sensitive clients from using these.

What opportunities does this present?

Demand from investors for real assets in global cities, such as data centres, is set to increase. It remains hard to create a supply of data centres in Tier 1 Chinese cities as land is scarce and there are limitations on power supply quotas and increasing regulatory oversight.

With long-term and increasing demand for these assets, combined with low levels of supply, data centres have the potential to provide investors with the opportunity to achieve sustained growth.

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