Spending time in a warm, noisy constructing filled with servers, routers, and storage devices may not be everyone's idea of a fun day trip—not to say a glamorous investment opportunity.
But these inconspicuous physical facilities, called data centers, are the beating heart of the Internet, cloud services and latest technologies like AI. As web usage increases and AI becomes more widespread, the necessity for high-performance data centers also increases. Actually ABI Research predicted The number of world public data centers will reach nearly 5,700 by the top of the 12 months and will exceed 8,400 by 2030.
This makes them a gorgeous physical asset for top net price individuals and investors trying to capitalize on technological trends and achieve high returns. However, investments involve significant risks, including significant environmental impacts, bureaucratic delays, and high construction and operating costs.
Nevertheless, data centers offer enormous market potential. According to research company statesmanThe industry is estimated to be price $416 billion this 12 months and reach $624 billion by 2029.
Vicente Vento, founder and managing director of investment management firm Digital Transformation Capital Partners, which was spun off from Deutsche Telekom in 2015, says the expansion of cloud services, increasing digitalization, data consumption trends and the AI boom are the important drivers of an industry that ” “the” forms the backbone of digital services”.
David Bloom, founder and managing director of IT-focused investment firm Goldacre, agrees that data centers could deliver “significant” returns for investors because of “continued demand” for cloud services and the “increasing deployment” of enormous data centers worldwide.
According to analysts CanalysIn the second quarter of 2024, global spending on cloud computing exceeded $78.2 billion – a year-over-year growth of 19 percent. This results in an urgent need for a bigger number of information centers; a report from Real estate services company JLL has found that data center capability in core European markets will increase by 16 percent this 12 months.
Bloom says: “We've seen evidence of this through major funds like Blackstone committing significant funding on this area and Google's commitment to spend $1 billion (within the UK) to understand the total potential of the industry to take advantage of the increasing demand for AI.”
Thanks to consistent and regular growth, the info center industry can offer investors long-term and stable returns on their investments, says Rajesh Sennik, partner at KPMG. Investments in data centers typically produce returns of 5 to 12 percent, he says, and selecting the precise location is critical because they “require extensive and reliable power supply.”
He urges investors to think about regions that supply access to renewable energy sources corresponding to hydropower, wind and solar energy to cut back each costs and environmental impact.
For many investors, Sennik says, hyperscale data centers — larger, scalable facilities that serve businesses and organizations with extensive IT needs — will likely be the most effective investment option due to “highly visible, long-term contracted revenue” they provide. “They also enable the deployment of enormous amounts of capital in a market with sustainable growth,” he says. “Investors can goal returns of as much as 20 percent on potential investments given the precise opportunity.”
Despite the potential for significant returns, investing in data centers may be dangerous, warns Vento. He says the complexity of information centers, particularly when it comes to their design and components, signifies that investors should ideally have some industry knowledge or understanding of those assets before investing in them.
With net zero targets at the highest of the company agenda, investors should consider the negative impact of information centers on the environment. Research from a climate data company climate from 2022 showed that the share of information centers in global CO₂ emissions (2.5 percent) is higher than that of air traffic (2.4 percent).
James Igoe, head of the Manchester office of investment management firm Redmayne Bentley, expects this energy consumption to rise over the following few years based on existing forecasts.
After weighing returns and risks, investors trying to advance their data center investments can pursue several paths. According to Igoe, they’re turning to non-public infrastructure funds with expertise on this area, corresponding to Blackstone and KKR. The caveat is that these funds typically expect a minimum investment of £10m per deal, he says.
Another option for non-institutional investors is to take a position in data centers through an actual estate investment trust (Reit) corresponding to Equinix, which recently launched posted a 7 percent increase in sales for the second quarter of 2024 in comparison with the identical period last 12 months. Igoe says: “Reits focused on data centers have performed positively during the last five years given the demand within the industry and the promise of future growth potential.”
Investors who’re deterred by the risks of investing in data centers but are still attempting to capitalize on their market potential could as an alternative put money into firms that make critical components for these assets, corresponding to processors, servers and cooling systems, says Jonathan Frick, partner at Management consulting firm Bain & Company.
AI systems, for which data centers are essential, could also repay for tech-savvy investors. “Beyond infrastructure, the applying layer of AI is growing even faster, creating opportunities for AI-driven software and services which will offer higher returns but additionally include greater technological risks,” says Frick.
