Digital infrastructure now a staple in investors’ portfolios

Digital infrastructure has become a staple in investors’ portfolios and is delivering good returns, delegates heard at Real Asset Media’s ‘Unlocking Opportunities: Digital Infrastructure & Data Centres’ briefing, which took place recently at PwC’s offices in London.

Tania Tsoneva, Senior Director, Global infrastructure research, CBRE Investment Management

“It’s a relatively new asset class, but digital infrastructure now accounts for a significant share of investment portfolios”, said Tania Tsoneva, Senior Director, Global Infrastructure research, CBRE Investment Management.

The sector’s share of private infrastructure deals has grown from 7% in 2018 to 17% in 2023, overtaking power and transport, and the expectation is the percentage will increase this year and the next.

“Data creation was expected to boom even before the AI rush last year, which accelerated the trend”, said Tsoneva. “Now the amount of data created is growing exponentially and calls for more and better data storage solutions.”

The term ‘exponential growth’ is not an exaggeration: data demand is forecast to grow from 175 zettabytes (billions of terabytes) in 2025 to 612 by 2030 to an astonishing 2,142 zettabytes by 2035.

Modern technologies such as gaming, streaming, autonomous driving and generative AI are fuelling demand, while power-hungry, data-intensive AI looks set to become as essential an everyday necessity as electricity.

Source: CBRE Investment Management

Data centres have emerged as the most in-demand asset class, serving key storage and computing segments: non-AI, such as software as a service; internet and platforms as a service; enterprise; consumer apps; and generative AI.

“They provide an essential service which is unrelated to economic demand”, said Tsoneva. “The fundamentals are compelling, as supply is constrained due to insufficient power supply, which is the main bottleneck”.

Other advantages are “sticky customers”, as there is a very low churn rate because switching is expensive; and “development returns are higher than for core, stabilised assets”, she said.

However, a risk/benefit balance assessment is necessary. Investors must prepare for increased scrutiny from governments, local councils, power utilities and ordinary citizens.

They must be aware that the big Cloud service providers like Microsoft and Google prefer to own and operate their own centres. The industry is highly concentrated among large data centre developers and operator companies.

Tsoneva had a warning: “This sector is not for everyone”, she said. “It is a highly specialised and complex field and it takes a quantum leap in skills to develop and operate a data centre. Caution is needed”.

Specialised development and technical expertise as well as economies of scale are needed. However, it is a crossover sector between real estate and infrastructure, providing stable income underpinned by medium to long leases. It can pay to take the plunge, she said: “If you have real estate experience, then you are in a good position”.