DATA ANALYSIS

Governments have an important role to play in the rapidly-expanding data centre market

Whichever device and platform you are using to read this piece, an unknown data centre somewhere is making it possible. Endless racks of servers hum away, storing and processing information, ready to provide whatever is required of them. Even the most technophobic among us would acknowledge the enormous importance such facilities now hold, underpinning the activity of pretty much every business out there.

This is not a new phenomenon of course, but what was an already rapidly-growing asset class has had rocket boosters put underneath by the advances being made in artificial intelligence. The need for the extra processing capacity that AI demands was one of the drivers behind Amazon’s announcement this week that its cloud computing arm will?invest ￡8bn in new UK facilities over the next five years.

Real estate news across the UK and Europe is littered with stories of vast sums being ploughed into the sector. If, as The Economist told us seven years ago, “data is the new oil”, then these investors are hoping to become the 21st?century equivalents of Rockefeller and Getty, whose various companies cornered so much of the United States’ first oil boom.

The demand, supply and operational dynamics of data centres make them particularly attractive to investors. Firstly, it is a market that not only has high current demand, but seems nailed-on to grow further – perhaps even exponentially – in the coming years. In the UK at least, as with nearly all real estate sectors, the difficulty of development means supply is unlikely to keep pace. And for landlords, data centres are perhaps as close as real estate gets to a bond; build the asset, secure a tenant, and as long as you stop the roof leaking the income flows in with the minimum of operational effort. This is of course a simplification, but perhaps not a huge one.

However, if you’ll excuse the pun, it is not all blue skies in the world of cloud computing. These facilities have huge energy requirements, and in many locations the electricity grid simply isn’t in a fit state to service these demands.?A proposed Google facility in Dublin was declined a couple of weeks ago?on the grounds that the grid couldn’t cope with the increased energy usage.

Even where the power infrastructure is in place, many countries operate on a knife-edge when it comes to simply having enough electricity to go around;?in Q2, the UK had to import 20% of its electricity, highlighting just how tight the market is at times. As was shown during the pandemic, and in the bunfight to secure gas supplies over the past three years, these cross-border markets can malfunction during times of great stress – hardly ideal for assets that need continuous, dependable supply.

Some sites try to overcome this with on-site generation – renewable, if possible – but nothing quite beats the efficiencies that come from a centrally-sourced supply. Small modular nuclear reactors may in time provide a solution, but far better would be a National Grid that could be depended on, with on-site facilities serving as a back-up in case of interruption.

Given that, it is to be welcomed that the UK Government has this week confirmed its previous position that data centres are to be?designated as critical national infrastructure. This policy automatically confers advanced cybersecurity protection – designed to boost investor and operator confidence – but will only truly pay dividends if it also leads to greater central government assistance on planning and associated infrastructure. It has been indicated (though not yet confirmed) that recent rejections of data centre schemes will be overturned, and this should also feed through to future proposals too.

On the energy front, a power system that is truly fit for purpose for the modern economy – both in terms of grid capacity and electricity generation – is in the hands of the Government. Every proposed scheme could be automatically approved, but none would be built if the power supply isn’t dependable. If Governments want their countries to be at the forefront of the digital age, they need to put the conditions in place to allow that to happen.

This will not be easy, particularly at a time of transition to sustainable energy – with all the problems of reliability that brings – and geopolitical upheaval. But it needs to be addressed, and urgently too. Real estate likes to think of itself as a buccaneering sort of sector, willing to take risks when it spots an opportunity and reap the returns as a result. Its private capital model has served it well, but in this case it needs some public sector stimulus too. Much as cities rely on public transport infrastructure to bring people in, data centres need power grids that meet their demands. And if ministers are tempted to assume that it can get away with a half-hearted approach, they need to remember: nobody votes for a Government that can’t keep the lights on.

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Have a great weekend.