It’s easy to forget when you are streaming a TV series, using ChatGPT or cloud computing, that the data that powers all of those things has to be stored in physical data centres somewhere.
No wonder then that the sector is attracting interest from the UK government and investors.
In September the government announced that data centres are to be classified as critical national infrastructure.
“The benefit of reclassifying data centres like this is that it gives more protection against things like cyber-attacks and extreme weather and puts them on a stronger footing when it comes to a nationwide approach to development,” says Yassar Jassani, Partner, Trowers & Hamlins.
It helps support the image of the UK as a secure place for data centre operators to invest. Data centres are seen as critical to maintaining the UK’s digital competitiveness and, therefore, an important part of the government’s drive for economic growth.
“Planning permission is one of the key issues for data centre developers and operators in the UK, and the critical national infrastructure categorisation may help make it easier. We might anticipate that there will be additional policy support to streamline planning processes for data centres to support the recognition that data centres are critical national infrastructure and which could facilitate approvals being obtained more efficiently,” says Josh Partridge, Partner, Trowers & Hamlins.
Deputy Prime Minister Angela Rayner has indicated that she will be involved in local planning decisions involving projects that bring significant economic benefits and investment to the UK.
Already planning refusal for two data centres in the South East, one in Hertfordshire and one in Buckinghamshire, are being reviewed at an inquiry.
Given the growth of digital services and, more recently, the rapid expansion in the use of AI, demand for data centre space will continue to rise.
Amazon Web Services has announced plans to invest £8bn in the UK over the next five years building, operating and maintaining data centres.
Data centres are, in essence, industrial-style buildings housing banks of computers to store digital information. Sufficient and consistent supply of power to run the computer banks and keep cooling systems working is critical.
The market breaks down into three main types of data centres: co-location, enterprise and hyperscale.
Co-location is a retail enterprise where an operator will rent out racks of computers to different companies. Some co-location data centres may just be leased to a couple of companies.
An enterprise data centre is owned by one business, say an investment bank, with full backup and continuity of service. They are considered best in class because a loss of service could lead to millions of pounds in losses.
Hyperscale is like co-location but potentially built to order for a particular business.
Enterprise data centres are a lower risk for investors because of the certainty of end user.
“If you're in a co-location data centre, the landlord has liability in maintaining power and financial penalties if they go down,” says Eileen Duncan, Partner, Trowers & Hamlins.
“As an investor in or a landlord of a co-location data centre, you might have more security around your income stream given the diversity of your tenant base over a longer term, and that income stream may be higher than under other models, but comes with a greater risk profile associated with obligations around operation and management.”
Data centres are not like traditional industrial units or offices but are more akin to operational real estate such as a hotel.
“The barriers to entry are high. It’s not simply a case of buying an asset, waiting for a return and flipping it,” says Jassani.
There are a number of options for data centre investment. You could invest in a fund, which generally involves very large sums, invest in public companies or, if you have suitable land (or the capital to acquire it), sell it on to, or partner with, a developer or data centre operator.
“If you're trying to get into the data centres market, you need to partner with somebody that knows what they're doing,” Jassani adds.
This could involve partnering with an operator from the start and bringing the capital to support their knowledge and expertise in designing and operating data centres.
Earlier this year, the chief executive of the National Grid said the power data centres use would increase nine-fold in the next decade, such is the expected growth. Having sufficient power adds to the complexity of data centres as a real estate asset and where they can be located.
The market has typically concentrated around London and the M4 corridor to the west of the capital, partly for this reason.
DC01UK is looking to submit outline planning permission for an 85-acre data centre campus outside London in Hertfordshire, which, if built, will be one of the biggest in Europe.
However, other parts of the UK are also attracting data centre development.
There has been substantial investment in data centres in Leicestershire and the wider East Midlands (Leicester and Nottingham).
And in Northumberland in the North East, Blackstone completed a deal to buy Northumberland Energy Park in May to build a hyperscale data centre.
Grid connectivity and the ability to access sufficient power are key issues for data centre deployment in the UK at the moment as the UK electricity infrastructure is close to capacity in certain areas, meaning that the developer may face lengthy delays or high costs in order to connect to the UK's electricity grid. There are programmes underway to try to resolve the electricity grid capacity issues but unfortunately there are no quick fixes and this makes the ability to obtain a viable grid connection a key factor in site selection for any data centre.
Separately there is an increased awareness and focus on the amount of electricity that data centres require and their environmental impact. In response data centres are also helping to drive sustainable energy strategies and technological advancements through the use of renewable power and battery storage.
“Tech companies are leading in this area – and as an example, Google has multiple agreements to offtake renewable power from numerous wind farms across the Nordics. The ultimate goal is for Google to run all their data centres 24/7 on green energy, and many other tech companies have similar goals,” says Partridge.
Given data centres' significant energy consumption and a growing global focus on sustainability and carbon footprint, the drive to decarbonise and reduce their environmental impact will only get stronger.
Technology is also being explored to harness the heat data centres generate. For example, could it be sold for use in heat networks on neighbouring developments?
“There are a lot of technologies coming forward and a number of pilot projects underway. It may be an approach that is mandated in the future to help meet carbon reduction targets,” says Partridge.
Data centres are a complex but dynamic real estate asset with lots of potential. At Trowers & Hamlins we have the experience to help you navigate this field, from energy and infrastructure specialists to commercial teams advising on ownership and funding structures, working alongside our real estate, planning and construction experts. Please reach out to us if you would like to know more.
Our previous articles in this series:
• Navigating opportunities in student accommodation
• Navigating the UK housing shortage: a BTR investment opportunity?
• Navigating value in the life sciences real estate sector
• Navigating rising demand: perspectives on investing into the logistics sector
• Navigating market shocks: light at the end of the tunnel for office investments?
