S-REIT guide Data centers REITs

Data Centres(DC) have become an important infrastructure in our modern industry. Data Centres Trust leases space out to organizations that require or provide Cloud computing and Distributed Ledger Technologies(DLTs) services. In this blog post, we would highlight some key issues that investors should know.

#1 Data Centre has high Electricity & Water Usage 

The consumption of electricity and water are some of the costliest expenditures of operating a Data Centre. Discounting master leasing agreements, the trust may be partially or fully responsible for the utility bills. Hence affecting net income. ESG concerns are particularly easy to identify in this business. In order to avoid environmental scrutiny from regulatory bodies and attract ESG-conscious tenants, Electricity & water usage must be kept competitive with other Data Centres.

#2 Data Centres will be tangled up in Politics 

There is no debate that consumer and financial Data have escalated to become a national security issue. Governments from the east and the west have adopted protectionistic policies regarding these sensitive data. There is a possibility that Government would force Tenants to relocate their servers housing sensitive data back to home jurisdictions. Therefore, it is important for a DC trust to have multiple properties spread across the globe to accommodate these policies.

 #3 Technological boom will bring more revenue for Data Centres

The upcoming decade is filled with new technological advancements. Technological boom like UCaaS, Cloud gaming, DLTs, and Central bank digital currencies (CBDCs) are gaining rapid adoption; DCs are needed to house these servers, mining rigs, nodes, etc… If management is able to capture this new industry, it will be a great payday for investors. 

#4 Tech companies’ tendency for vertically integrated models

It’s no secret that Big tech companies like to control the entire value chain. The concern is that big tech might just build and design their own DC. Personally, I think that threat is only limited to DCs in the USA. For silicon valley, Big tech to own DCs outside of the US would require too many resources. They would have to hire additional legal advisers outside of the USA to keep in compliance with building codes, land lease agreements, and other bureaucratic nightmares. It is easier for them to expand through leasing “shell & core” data centers in foreign jurisdictions. 

#5 Data centres are prone to concentration risk due to Low tenants base

Many small enterprises outsource their cloud services to companies like AWS, and Microsoft Azure. Hence DC Trust’s main Customers are Enterprise that provides cloud computing services, Government, and DLT companies. When compared with other REITs, DC Trust’s concentration risk is higher. It is not uncommon for big tenants to lease an entire building. Hence if those tenants were to go bankrupt it would heavily impact the gross rental income for the Trust.

#6 Long WALE period for Data Centres

Long WALE provides reassurance for future income. Investors should make sure that the lease agreements must be stapled with “interest rate hikes” and “energy & water” price adjustment clauses. Otherwise, this could risk the profitability of the property.