Principal Real Estate Investors to launch European data centre strategy

Principal Real Estate Investors is aiming to launch a new strategy this year to take advantage of the strong fundamentals underlying European data centres.

The US group, whose European arm is known as Principal Real Estate Europe, aims to attract between €400 mln and €500 mln of equity to the platform, which should provide it with enough firepower to assemble data centre assets with a gross value of between €800 mln and €1 bn.

The company is expected to be a forerunner given Europe is yet to see data centre-specific real estate funds.
 
However, Principal Real Estate Investors already has a long track record in the sector given the group first started investing in the US data centre market as far back as 2007 and continues to invest in the market.

‘The European market is different to the US, but trends that have happened there are now starting to be seen here,’ said London-based portfolio manager for Principal Real Estate Europe, Sebastian Dooley.

‘With all the factors, we would say European data centres is not a new asset class, but in terms of institutional investing, we think it’s emerging.’

The timing is right for a number of reasons, not least of which is that data centre operators are beginning to achieve investment-grade credit ratings, thus giving investors greater confidence in the asset class. Also, Covid-19 has only served to intensify data centre end-user requirements.

While there is strong demand for assets, there is currently an insufficient supply of assets for sale, noted Dooley.

Yet, in Europe, the so-called FLAP - D markets of Frankfurt, London, Amsterdam, Paris and Dublin are set to expand significantly. For example, data centre space in Frankfurt is forecast to double and Amsterdam provision is expected to grow by 1.5x between 2021 and the start of 2025, according to a report issued by Research and Markets in January.

Europe has certainly begun to see data centre transactions and the creation of platforms. Digital Colony is one example of an active player with a fund investing in both the US and Europe concurrently. In another example, KKR announced in 2020 plans to put $1 bn into a new European data centre platform called Global Technical Realty.

However, in Digital Colony’s case, its funds are wider than data centres, tending to invest also in other digital realty assets such as telecoms towers. KKR’s investment in GTR is made out of its infrastructure business, not real estate.

Principal Real Estate Investors expects to adopt a core-plus approach, purchasing existing assets, enhancing the income and aggregating them to a much larger portfolio. It is already building a pipeline of opportunities.

‘What we’ve invested in quite a lot in the US, and we’re seeing moving over here in Europe is enterprise leaseback-style transactions. This is where you have large, international banks and insurance companies, and manufacturing companies for example, who traditionally have built and owned their own data centre assets but are now looking at rationalising their IT infrastructure because owning and operating their own assets isn’t a particularly efficient use of their capital,’ said Dooley.

‘We believe, especially post-Covid, there will be a lot of companies looking at their balance sheets and this should create transaction opportunities for us.’

Investors domiciled in Europe and Asia are expected to back Principal Real Estate Investors’ new strategy, and it is slated to officially launch late in Q3 or in early Q4.

Principal Real Estate Investors is part of Principal Global Investors, which is in turn owned by Nasdaq-listed Principal Financial Group founded in 1879.

In January, the company issued its own report on data centres, which can be found here