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Article | 08 April 2021 | ESG
Written by Zsolt Kohalmi, Global Head of Real Estate and Co-Chief Executive Officer at Pictet Asset Management
The expansion of the digital economy is fuelling demand for data centres, but also raising concerns about their energy use. The solution to this problem comes in the form of an attractive green real estate investment.
Every minute of every day, the world’s 4.6 billion Internet users spend $1 million online, send 41.7 million WhatsApp messages, make 1.4 million calls and upload 500 hours of video. With the rise of 5G technology, the daily volume of data will surely surge further.
That, in turn, will cause an equally powerful increase in demand for a specialist kind of real estate: the data centre.Zsolt Kohalmi, Global Head of Real Estate and Co-Chief Executive Officer at Pictet Asset Management
In Europe alone, the data centre market is forecast to grow by USD71 billion over the period 2020-2024, representing a compound annual growth rate of (CAGR) of 15 per cent. This presents a unique investment opportunity for real estate investors looking for an asset class with strong fundamentals. Data centres offer relatively attractive yields ranging between 5-7 per cent for core, prime locations in Europe – and typically tend to have longer length inflation-linked leases, offering some protection against inflation.
But the opportunity comes at a cost. Processing and storing an enormous amount of data is highly energy intensive. By 2025, data centres may account for 20 per cent of the world’s energy use, and 5.5 percent of its carbon footprint according to Swedish researcher Anders Andrae.
Nordic data centre investment volume (EUR bn)
Fortunately, there is widespread acknowledgement that the sector needs to reduce its outsized environmental impact – from companies that own or run data centres, their shareholders, consumers and regulators. Achieving this requires a two-pronged approach.
The first step involves optimising data infrastructure. The technology that is housed in data centres can be made more efficient, for example through installing micro servers, or through using artificial intelligence to optimise server and energy utilisation.
The second step entails making the buildings greener. That’s where active real estate investors can get involved and, by extension, capitalise on a sustainable investment opportunity. As with all real estate, location is crucial. For data centres, it’s not so much about transport links or footfall, but more about the weather – cold climates help reduce the consumption of energy, much of which is usually spent on cooling down the machines. It’s no coincidence that data centre investment in the Nordics is forecast to nearly double between 2018 and 2025 (see chart). Crucially, the region is also well-equipped with super-fast fibre networks – the motorways of the digital world, which use cables made up of glass strands over which data is transferred in the form of optical light.
Then it’s on to the buildings. Having them run on renewable energy is key – even better if it is produced on site. Building insulation is also important, as is close monitoring of utilities consumption to ensure optimal power usage. New-built data centres boast some of the highest green credentials. But the very act of building from scratch is far from green – production of cement alone accounts for around 8 per cent of global carbon emissions. Principally, refurbishment and retrofitting will almost always remain better for the environment. The refurbishment route also provides the best potential for real estate returns through adding value.
Pictet’s recent acquisition in Akalla, on the outskirts of Stockholm is an example. Part of the building is already occupied by a data centre, and over time we intend to convert the majority of the remaining area, which is currently a printworks, into data centre space. Some solutions are low tech – such as adding new floor slabs, to optimise the space, thereby improving efficiency. Others are truly innovative. Data centres generate a lot of heat, which is normally emitted into to the environment. We are planning to capture and channel that heat into a district heating system that provides heat to residential units within the municipality. Additionally, we are evaluating the option of generating energy ‘on-site’ through solar, wind or other renewable means. Locally produced energy is undeniably more efficient to consume, compared to that which is transported across large distances through the power-grid, which suffers significant transmission losses.
Investing in green data centres is one way to tap into the robust growth of technology while fulfilling environmental objectives. As our lives become increasingly digital – accelerated by the pandemic and by the arrival of 5G – demand for data centres will continue to grow exponentially. We believe this area of commercial real estate will very quickly develop into a bond-like investment, providing a stable stream of returns for core and core-plus property portfolios.
However, for now, due to the speed of growth and lack of suitable premises, there is also an opportunity for real estate investors to generate additional return by re-purposing existing buildings. The challenge is to find assets with a sufficiently large floor space (such as large logistics centres), in a strategic location where dark fibre and electricity meet, and to take a creative, innovative approach to making the building as green and efficient as possible.
 Domo, "Data never sleeps 8.0"
 Infiniti Research, "Data center market in Europe"
 World Economic Forum
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