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The data centre industry is experiencing explosive demand growth driven by expanding use of technology and structural shifts in how data is consumed. Developers are building but they can’t keep up with demand—driving vacancy rates to all-time historic lows and rents to rise. The amount of capital required to develop the capacity to fill forecasted demand is unprecedented in the industry.
For additional detail on these opportunity drivers, see our recent paper 10 trends driving the global data centre market.
Data centres are Increasingly Attractive to Institutional Investors
Demand/supply dynamics create a landlord-friendly market attractive to institutional investors looking for opportunities to diversify their portfolios with a viable alternative asset class.
Advantages of the data centre sector include:
Portfolio diversification
As part of a broader real estate portfolio, data centres are a smart diversification strategy due to low correlations to other assets and a favorable risk/return profile. A diversified real estate portfolio with industrial and data centre assets yields (in the example shown in Exhibit 1) a much larger return for the same level of risk as a portfolio with industrial and apartment assets.
EXHIBIT 1: Optimal portfolios with data centres generate higher returns for the same level of risk (sample listed REITs portfolio)
Long-term stable cash flows from high-quality tenants
While a relatively small number of tenants consume the vast majority of data centre capacity, these are the world’s largest technology companies with excellent credit profiles. Investors can reduce concentration risk with a larger fund vehicle that provides exposure to multiple assets in multiple markets.
Longer leases, many times in excess of 10 years, give investors exposure to cash flows from high-quality credit tenants at higher yields than most other property types.
Scalability
As investors look to diversify their portfolios to include more alternative investments, data centres can help to quickly achieve allocation goals.
Data centres are one of the few alternatives that can be done at scale without having to assemble large portfolios of assets. Given the outsize magnitude of data centres relative to other alternative investments, they represent a major shift in the investment portfolio.
Collaboration is Key
Given the highly specialized nature of the data centre industry, experience and access are critical to successful execution. Data centre investing requires a high degree of specialization to source, build, and lease the properties.
As an active commercial real estate investor for more than 60 years— including more than 18 years in the data centre sector—Principal Real Estate has witnessed the asset class evolve and adapt to the changing needs of occupiers. Our experience has resulted in a historically favorable track record and meaningful industry relationships.
For more information, please visit www.principalam.com/ax/principal-real-estate-data-centres.
The information in this document contains general information only on investment matters and should not be relied upon nor should it be construed as specific investment advice, an opinion or recommendation. Information derived from sources other than Principal Global Investors or its affiliates is believed to be reliable; however we do not independently verify or guarantee its accuracy or validity. Subject to any contrary provisions of applicable law, no company in the Principal Financial Group nor any of their employees or directors gives any warranty of reliability or accuracy nor accepts any responsibility arising in any other way (including by reason of negligence) for errors or omissions in this document. All expressions of opinion and predictions provided herein are subject to change without notice. Any reference to a specific investment or security does not constitute a recommendation to buy, sell, or hold such investment or security. Investing involves risk, including possible loss of principal. Past performance does not guarantee future return.
Potential investors should be aware of the risks inherent to owning and investing in real estate, including: value fluctuations, capital market pricing volatility, liquidity risks, leverage, credit risk, occupancy risk, and legal risk. Infrastructure companies are subject to risk factors including high interest costs, regulation costs, economic slowdown, and energy conservation policies. This document is intended for sophisticated institutional and professional investors only.
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