Investor appetite for European data centres is expected to grow, but institutional investors will need specialised skillsets and operational expertise to navigate the sector’s complex risk profile, according to a new report.
A survey by European non-listed real estate body INREV found that the flood of capital entering the data centre sector is seen by many investors as an opportunity to gain exposure to a high-growth asset class with strong structural tailwinds.
The survey by the real estate association showed that demand driven by cloud computing, AI and the wider digital economy will cause this interest to grow further.
“The key challenge is that the data centre sector is a sophisticated and fast-evolving ecosystem that requires a complex skillset and operational know-how to enter and to fully understand,” the report said.
The INREV report, titled Data centres: navigating a fluid asset class, draws on in-depth expert interviews with investors, fund managers, developers and operators representing a combined global alternative assets under management of over €1trn.The study highlights how the hybrid nature of data centres, combining elements of real estate, infrastructure and private equity, appeals to a wide range of institutional investors who prioritise return potential over the asset class categorisation.
The report also identifies five principal investment models associated with data centres, as well as the key risks that existing market participants and new entrants must understand. “These risks include power and grid connectivity, planning constraints, technological change, tenant quality, along with liquidity and exit risks and sustainability and potential political or social resistance.”
The case for allocating to data centres is ultimately investor-specific. The opportunity is most compelling where investors can clearly assess the asset’s value proposition and potential for value creation, while having the capabilities to underwrite and manage its distinct risks, the study found.
According to the report, while traditional real estate value is determined largely by location, data centres derive value from a different set of characteristics. While location remains important, particularly in relation to network connectivity and proximity to demand, interview participants consistently identified power availability, the timing of grid connections and planning and zoning approvals as the primary drivers of value creation.
Lease structure and tenant quality act as secondary considerations. Consequently, the ability to secure and access power has become one of the sector’s defining competitive advantages.
Iryna Pylypchuk, director of research at INREV, said: “Investors should resist treating data centres as an asset class that every institutional portfolio should necessarily hold. For some, this may support direct or private market exposure, while for others, a specialist manager, listed vehicle or developer/operator partnership may be more appropriate. For other investors, limited or no allocation may remain the right decision too, at least for now.
“As the European data centre market evolves and institutional participation continues to broaden, investment decisions will become less about securing exposure to a high-growth sector with strong structural tailwinds, and more about determining the appropriate scale and route of that exposure.“
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