‘Opportunities everywhere’ in digital infrastructure in Europe
The supply/demand imbalance is attracting capital, but investors need to do their homework to achieve the double-digit returns the sector can offer, experts agreed at Real Asset Media’s ‘Unlocking Opportunities: Digital Infrastructure & Data Centres’ briefing, which took place recently at PwC’s offices in London.
“The digital transformation is accelerating demand for data-intensive services and investors are keen to get a foothold into the sector and tap into such a mega trend”, said Cay-Marco Fritsch, Partner, Corporate Finance, M&A Digital Infrastructure, PwC. “It has become a strategic asset class and there are tremendous opportunities for existing operators as well as plenty of room for new entrants to come in.”
In Europe many real estate investors are still waiting in the wings, unsure how to proceed.
“The market is becoming more discerning”, said Fritsch. “Some investors are not familiar with the technical specifications and how to translate the project into a business plan that is actually investable. Operators need to create some strategic scale to be in the data centre space”.
One solution is to pair with an operating partner, who must be chosen carefully.
“For us as a debt provider the key factor is an operating partner who understands the sector”, said Tom Henwood, Associate Director, ICG Real Estate. “You need the correct combination of skills and technical expertise as well as real estate knowledge”.
The market has been driven by M&A activity, as existing operators want to go beyond organic growth and increase their market share.
There is a lot of capital willing to be deployed in the sector, but there’s also a scarcity of assets.
“The fact is demand has grown exponentially while supply has grown linearly”, said Henwood. “From a real estate perspective the amount of lenders in the market means we can get better risk-adjusted returns. There are interesting opportunities in the middle market. We’re seeing minority stake sales and companies being more effective with their capital structures.”
There’s a long way to go for the sector in Europe, where supply is limited and tends to be concentrated in and around a few large cities like London, Frankfurt, Amsterdam or Dublin. The US has twelve times the capacity per capita compared to Europe.
“Digital infrastructure is a global opportunity, but 30% of capacity is in the US which will continue to attract a lot of the investment, especially in generative AI”, said Tania Tsoneva, Senior Director, Global Infrastructure research, CBRE Investment Management. “But that doesn’t mean there won’t be opportunities elsewhere, Europe included, because demand is growing everywhere”.
Europe is so far behind that investments are needed everywhere, but they are usually correlated with the availability of power – in France, for instance, in a strongly industrialized nation like Germany, or in a country with great renewables capacity like Spain.
“Anywhere in Europe is good”, said Henwood. “I would opt for undersupplied secondary cities in Germany and the UK, but Southern Europe is a good opportunistic bet, as there’s availability of solar power and fibre optic cables are also coming in.”
