Investing in Data Centres
The growth in cloud computing is driving strong demand for data storage and purpose build data storage facilities. In this guide we dive into the fundumentals of investing in data centres.
A data centre is a facility typically used to house networking, data storage and communications technology infrastructure including servers, storage devices, switches, routers and fibre optic transmission equipment. Depending on user requirements it can be a simple closet, a room or a dedicated building.
Larger data centres are highly specialised and secure buildings, and may be owned and operated by either the user or a third party provider. These data centres are designed to provide a secure and robust environment specifically designed to house the IT infrastructure of carriers, corporations and government.
Data centres owned by third parties may house the equipment of numerous customers (Colocation). Data centres located at the convergence point of numerous communications networks can be used as interconnection hubs, enabling customers to connect to multiple networks and exchange traffic with each other. In addition, data centres may provide an “interconnection room” allowing telcos to physically connect to one another, and internet service providers (ISPs) to connect to each other through an internet exchange point (IXP).
Typically, IT equipment housed in colocation data centres is owned by the customers and is stored in racks located side by side in parallel rows. Many organisations across most industries use data centres in one way or another to house their data and IT equipment and as an integral part of their disaster recovery planning. Larger data centre customer bases typically tend to comprise medium to large corporations, IT companies, ISPs, local and state governments and consolidators of space for smaller customers.
What drives growth in data centres?
Starting with the basics, data centers can be viewed as a specialized category of industrial real estate that serves as the physical location for servers and IT equipment that store and process data. We may store increasing amounts of data in the cloud but cloud service pro-viders, hosting providers, and networks need physical real estate. To put this differently, greater workloads and computations increase the need for IT hardware and network equipment, which in turn requires physical space and infrastructure that data center REITs pro-vide. Thus, industries that analyze, transact, store and serve large amounts of data are natural tenants such as technology, social media, mobile and eCommerce as well as financial services and health care.
While there isn’t an easy way to quantify future demand, the factors listed below make us more confident of the diverse and secular nature of demand:
- Enterprise Workload Outsourcing is one of the biggest drivers of long-term growth in the sector. A surbey by Alphawise CIO suggests that enterprises plan to move 46% of their IT workloads to either external data centers or cloud services.
- Regulatory drivers such as data sovereignty enforce requirements on the physical domicile of servers and data and have opened demand in new markets such as Germany and Canada, particularly for financial services and health care tenants which account for 40% of leasing demand.
- Digital economy which is a growing vertical, comprises of social media, media and online streaming, eCommerce and mobile retail companies. Historically, many of the larger ten-ants such as Amazon and Facebook prefer to own their data centers given their outsized requirements. But this is a rapidly evolving area with new entrants and has consistently accounted for 20-25% of leasing volumes since 2014.
- New verticals include sectors that are not currently among the top users of space but could be heavy users of data and thus a potential source of future demand. These include auto-mobiles and ride sharing companies and artificial intelligence and machine learning (still nascent but rapidly gaining trac-tion among CIOs as suggested by our Alphawise research).
The number of global internet users has grown from 1.15 billion in 2006 to 4.1 billion in 2018, and now represents more than half of the global population. Apart from the sheer growth in the number of users, usage of the internet has also changed dramatically. The widespread use of online social networks and other sites where users share photos and videos has increased dramatically. As a result the need for data storage and computing is currently undergoing a surge in demand, and Australia has been at the forefront of the growth.
The recent general acceptance of Cloud computing has prompted a number of organisations to migrate their computers to colocation data centres or move to public Cloud-hosted applications. Colocation as a percentage of global data centre space has increased from approximately 8% in 2007 to approximately 24% in 2014. In Australia, it is estimated that colocation storage revenue represents approximately 29.2% of Australian data storage revenue.
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For more information on commercial property in general, read our article Investing in Commercial Property – The Ultimate Guide.