GUEST COMMENTARY: Risk versus reward in data centres

What do investors need to successfully operate a data centre? Chis Jones of engineering consultancy Hydrock explains the ins and outs of managing this new star asset class.

Data centres were rising in popularity long before lockdown, but the effects of Covid-19 firmly cemented them as the new star asset class. When the pandemic started and we all turned to Zoom, we ushered in a new era of data centre dependency.

With increased demand and ongoing lack of capacity, there is a rush to develop these assets. As investment in the sector continues to rise, more developers and institutional investors, such as GIC or AXA, are building their own operations and facilities management expertise, or developing joint ventures and prolonging their active involvement in the data centre lifespan to generate longer term revenues.

Dark versus powered shells
At our company, we have seen many clients move from the traditional logistics sector into data centres, with a view to providing either a dark shell, powered shell or fully serviced facility. Segro, for example, had traditionally been a dark shell data centre provider – meaning they effectively built sheds and leased these to data centre operators.

Its model has evolved more recently as the firm saw the increased value of providing both power and operational infrastructure. Many companies which traditionally provided dark shell assets are now moving towards a powered shell solution.

Some are taking things a step further, with the likes of AXA buying up companies such as Data4 to cover the whole operation.

Shifting to a build-and-operate model allows developers to expand and offer facilities management services. We believe that by taking on additional operations, real estate investors and developers will be separated from ad hoc players that dip their toe into the world of data centres by building dark shells, with the former becoming experts that are more likely to be able to compete and roll out their models internationally.

We are increasingly supporting developers, such as Kingston Space Properties, which are turning to facilities management and operating assets themselves to reap the rewards, both in terms of increased portfolio expertise and returns.

Digital twins
To reduce the risks of venturing into a new sector, it is important to work with trusted partners and to make use of the latest technologies.

In particular, the growth in use of digital twins that replicate the entire systems and make-up of an asset is transforming the level of risk in the design, build and operate phases, enabling potential issues to be identified and rectified in a virtual world prior to construction.

For those with the appetite and commitment to benefit from the long-term gains that the operational element of the sector can provide, continued investment is key. Data centres should be updated every 5-10 years to ensure they can keep up with the ever-advancing technologies, industry trends and sustainability requirements.

Developers which commit to this investment to upgrade their assets and offer facilities management will not only consistently increase the lease value of the site but will improve their ability to generate more revenue.

On the other hand, those developers looking for short-term gains are unlikely to invest in expanding their models to include the operational side – if they are looking for a low-risk solution, investment would be purely focused on building the site, a dark shell.

Lower risk does, of course, come with less reward, with investors missing out on the potential large amounts of revenue generated through the lucrative design/build/operate model.

Risk appetite
Aside from risk alone, the decision on whether to get involved in the operational side of data centres is ultimately down to the experience and appetite of the individual investor. Operational management will present a higher risk if the building has not been built correctly. Whilst the nature of the assets that house data centres is not hugely complex, these must be reliable.

If the building isn’t fit for purpose and an investor inexperienced in data centre management attempts to maintain and operate that asset, they will face higher risk.

Data centres present some complex and unique challenges so, as with any real estate capital deployment, it is important for any investor to go in with their eyes wide open.

Where investors lack expertise, provided they get good advice and the right partners with adequate experience, there is no reason they can’t be successful when it comes to managing the operations of this booming asset class.

The risk versus reward equation will determine whether investors should get involved in developing data centres and taking on the operations, or whether they leave it to the experts and remain the landlord of a dark shell.


Chis Jones is technical director, sector lead for data centres and mission-critical facilities at UK engineering consultancy firm Hydrock


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