Investing in the Cloud-Future with Real Estate

in Advisory, Real Estate, 09.01.2015

Investments in data centers have become an attractive niche segment in the USA. Worthy of mention is Digital Reality Trust, an investment vehicle for investments in data centers with a market capitalization of more than USD 9bn. This vehicle was created by Calpers, the largest US pension fund, and the private equity firm GI Partners in 2001. Very little institutional capital has flowed into data centers in Switzerland so far. Reasons for this could be the lack of knowledge and expertise, potential risk clusters or limited alternative use potential.

Switzerland as a data safe

According to Broadgroup, the total area of data centers operated by external suppliers[1] in Switzerland in 2013 was estimated at around 150,000 m2. Within Europe, Switzerland has the sixth largest area provided by external suppliers. Only the United Kingdom, Germany, France, the Netherlands and Spain offer more. The density of data centers[2] in Europe is only higher in Ireland, which reinforces the importance of Switzerland as a location for data centers.

Security is the key factor when selecting the location of a data center. Suppliers of data centers favour locations with the least possible unforeseeable risks and which offer economic, political and social stability. Switzerland, with its tradition of discretion and strict data protection regulations, is one such location. Other important criteria include the speed of the broadband network and security from natural disasters; unfortunately, in the former, Switzerland is only classified as average in an international comparison. Another crucial factor is a secure and inexpensive electricity supply, as data centers are of critical importance and their operations have high energy requirements.

Switzerland’s ranking in the Data Center Risk Index 2013

risk index 2013

Source: Source8, hurleypalmerflatt und Cushman & Wakefield (click graphic to enlarge)

The Data Center Risk Index compares 30 countries using 13 risk categories and identifies the suitability of a country as a location for a data center. Top ranking (1) means that the country has performed best within the category and is particularly suitable as a location for a data center.

A property with complex requirements

In contrast to traditional investment properties, modern data centers must meet greater infrastructure and security requirements. In terms of infrastructure, requirements for cooling, electricity supply and networks are higher. In order to ensure the safe storage of highly sensitive data, data centers must also offer maximum protection from fundamental risks (e.g. earthquakes, fire, flooding), internal risks (e.g. sabotage, data theft), external risks (e.g. terrorism) and of course the risk of technical breakdown. Standard security measures include redundant infrastructure, access controls, heat and infrared sensors, camera surveillance, fixed fire extinguishing systems and emergency generators. The construction of a data center therefore requires a high initial investment and high degree of constructional knowledge and expertise.

Market players get in touch

Despite a good market outlook, investors remain cautious in terms of investments in data centers. An investor-operator model lends itself well to investments in data centers. In such instances, the institutional investor performs the role of the owner of a data center and receives a standard market rental income from the operator (external supplier). Sale-and-leaseback models have a similar purpose, i.e. the institutional investor acquires an “in-house” data center and is guaranteed a long-term rental income from the seller; the institutional investor has the opportunity to diversify its portfolio; and the external supplier and seller of an “in-house” data center can release capital for investment in further expansion or in its core business. As marketability improves, it may be possible to introduce new investment vehicles with a focus on data centers, or to position data center operator bonds through the capital market in Switzerland. In view of Switzerland’s appeal as a data center hub and the rapid advance of digitalization, this niche segment has an interesting investment profile.

 

[1] The data center landscape in Switzerland can be divided into two categories: the classic “in-house” data centers, i.e. data centers which are operated by companies in their own premises for their own purposes; and the growing number of specialist suppliers (external suppliers) whose core business is the operation of data centers.
[2] Defined as the total area of data centers per capita operated by external suppliers.

 

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