Ready for data centers

Interest in data centres is growing – and not just with users, but with investors as well. But it takes expert knowledge to work with the new asset class – a prerequisite for good yields.

They “house” servers, but are not hotels. They offer rooms for personnel, but are not office properties. Data centres are different. The closest comparison would be a high-bay warehouse, says Karsten Jungk, Managing Director at real estate consulting firm Wüest Partner. However, their construction costs are exponentially higher than for a logistics building. “You cannot build a fully equipped data centre for less than €10,000 per square metre,” says the expert. “Because of the complex requirements, you have to calculate €100 million or more for a modern data centre.” Investment costs are high, but can be worth it in Jungk’s opinion. “Data centres are attractive for investors who are willing to deal with the unique features of this speciality property.”

Nothing works without power

People like to call data centres the backbone, heart or brain of digitalisation. That just shows the central importance of their function in our digital society and economy – and the need for computing power, data storage and processing keeps on growing. Big Data, Internet of Things, cloud computing, virtual reality and streaming services are not the only drivers of this development. The messages that we love to send with our smartphones using a variety of different communication channels also add to the growth. “After all, the internet doesn’t come out of power outlets,” states Christian Herzog, Head of IT Infrastructure and Communication Technologies at Bitkom, Germany’s digital association. “All the broadband cables that we use end up in a data centre somewhere.” And these data centres differ in many ways from the usual properties.

Data centres are attractive for investors who are willing to deal with the unique features of this speciality property.
Karsten Jungk, Managing Director at real estate consulting firm Wüest Partner

The most important – and at the same time most painful – point is the power supply. It cannot fail for any reason, otherwise data can be lost. For that reason, there are usually redundancies in the power supply with independent lines running to different power plants. If there is nevertheless a brief disruption of electricity, a battery-powered independent power supply immediately switches on. Data centres protect themselves against longer power outages with their own emergency power supply in the form of at least one large diesel generator.

A question of safety

Electricity is needed not only for the servers, but also for air conditioning systems to provide sufficient cooling because the processors generate heat. To keep them from overheating, data centres use a variety of methods such as cold air or water to cool the servers. Microsoft is currently testing a new solution for this with a small underwater data centre off the coast of Scotland (see photos). Fire protection and fire alarm systems are also essential in every data centre. Fires are extinguished there with special gaseous extinguishing agents because water would cause extensive damage to the technology – and the power would have to be shut off first. One very effective method of preventing fire is to reduce the ambient oxygen levels in the data centre so a fire cannot start.

Safety is of the utmost importance in every respect. Builders ensure that data centres are built outside of danger zones including air corridors, chemical facilities, earthquake and flood zones, and they also equip data centres with surveillance cameras. Security personnel and entry control ensure that sensitive data on the servers is protected against physical access.

Racks, cages and suites

Data centres that are let by their operators to a variety of customers – and not used by their owners – are called colocation data centres. According to Bitkom, they are in vogue. A growing number of businesses are utilising large colocation data centres that offer their buildings as a very professional and comparatively cost-effective option for housing customer servers and providing connectivity. The Borderstep Institute predicts that colocation data centres will occupy around 45 percent of total IT space in German data centres by 2020.

Shutterstock / Maxx-Studio

One of these colocation suppliers is Frankfurt-based Maincubes, a Zech Group company, which owns Art-Invest Real Estate, a pioneer in Germany in offering its customers data centres as institutional investment properties in its portfolio. Maincubes opened its newest data centre in 2017. It is located in Offenbach and leased from the investor, Keppel DC REIT from Singapore, in a sale-and-lease-back process. From the outside: a windowless, green and white cube with a great deal of technical equipment on the roof. From the inside: rooms with six-metre-high ceilings and a raised floor for cooling the server racks. “One quarter of the construction costs went into the shell, the building. The remaining three quarters were needed for the technical equipment,” explains Oliver Menzel, CEO of Maincubes. “At least half of the surfaces had to be used to house the technical equipment.” As the operator, Maincubes not only provides the space, it also delivers the security and ensures there is power, cooling and internet connectivity. The remaining spaces are available to customers, who bring in their own hardware and software and can choose how many racks they need for their IT, or the next larger variation (cage), or even an entire suite.

The company E-Shelter is also located in Frankfurt am Main. It’s no coincidence, because the German data centre industry’s facilities and expertise are concentrated there. Many cables come together there because the world’s largest Internet node, DE-CIX, is located in Frankfurt am Main. The city joins London, Amsterdam and Paris as Europe’s leading locations. E-Shelter is one of the largest operators in Europe. The company, which belongs to Japan’s NTT Group, operates 13 data centre locations, some of which are still under construction. E-Shelter develops and builds all of the data centres itself.

In the past, the industry sometimes repurposed existing warehouses. These days, new construction is preferred which is designed for data centre operations right from the start. “We get better with every data centre,” says Volker Ludwig, Senior Vice President Sales at E-Shelter. E-Shelter has added further offerings and functions such as a customer lounge that can host conferences or presentations with up to 70 attendees. In the Innovation Lab, customers and business partners can network to test their hardware and software in real-world production environments or to test new technologies. Ludwig has a positive outlook on the future of large data centres. “They will be around for a very long time because they are the foundation of digitalisation. After all, where should the next movie that everyone wants to see come from? The cloud is not in the sky.”

Data centre operators are loyal tenants.
Michael Dada, Associate Director Advisory & Transaction Services at CBRE

Loyal tenants

Michael Dada has also observed the growing professionalism in the industry. He is the Associate Director Advisory & Transaction Services at global real estate service provider CBRE and recognises that data centres are an increasingly interesting asset class for investors. One convincing argument is the longevity of lease periods, which often exceed 20 years. “Data centre operators are loyal tenants,” notes Dada, “because moving a data centre is expensive and difficult.”

Another unique feature is that rent is not usually calculated per square meter and month, but rather per kilowatt delivered to the tenant. Electricity is the vital blood flowing through a data centre’s veins. CBRE has calculated that ten percent of Germany’s energy consumption is attributed solely to data centres.

Therefore, energy efficiency is a hot topic. Energy prices are more of a disadvantage when considering Germany as a location, which among other things gives an insight into the law for expanding renewable energies, the Renewable Energies Act (EEG). “Electricity prices in Germany are quite high compared to the rest of Europe due to the EEG reallocation charge and other tax components,” says Ralph Hintemann, Senior Researcher at the Borderstep Institute. “In other countries, energy prices are two to three times less expensive in some cases.” Long approval processes are also somewhat of a hindrance in Germany as well.

By contrast, the advantages include a high degree of expertise among data centre operators and service providers as well as the areas of data protection and IT security. “A large number of data centres are currently under construction in Germany,” states Hintemann. “Between 2013 and 2017, investment in the new construction and modernisation of data centres rose in Germany from €750 million to over €1 billion.” With 25 percent of the European data centre capacity, Germany is considered the largest data centre market in Europe. However, in the past, data centres were more commonly considered investment properties in Asia and the USA. People are talking about Real Estate Investment Trusts (REITs), organised specialist investors with many years of expertise.

In addition to large data centres in cities, there is growing interest in smaller data centres in the countryside. Self-driving cars are one reason for the growing importance of edge data centres. The sensors on self-driving cars require low latencies, meaning short reaction times. All the data must be processed quickly and as close as possible to the place where it is generated.

Cool climate as a location advantage

For investors, there are a variety of opportunities for investing in a data centre. They can either invest just in the building or act as the building operator as well. The potential yields are growing along with the growing scope of investments that can expand to IT. “Even though the investment market for data centres is still in its infancy, it is slowly maturing,” says Lydia Brissy, Director European Research with real estate consultant Savills. “Investments are also moving more in the direction of sale-and-lease-back options. The yields, which can peak at 5 to 7 percent, make this appealing compared to other investment classes.” In Europe, Savills’ data centre investment index from April 2018 highlights the northern countries as particularly interesting locations for large facilities. Norway, Sweden and Finland hold the first three places. Builders and operators expect a moderate, cool climate here and comparatively low energy costs – advantages that internet giants like Google and Facebook have long since discovered for themselves.

By Petra Nickisch-Kohnke

Title image: Microsoft Natick / Red Box Pictures / Franck Betermine

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