This blog is an introduction to the Data Centre (DC) sector, and addresses some of the structural benefits the industry is receiving from generative AI.
New AI technologies have been a key part of the broader investment narrative, driving strength in the US and wider share markets over the past 12 months. AI is speculated to be the next material technological step-change driving human productivity: changing the way we work, communicate, and problem-solve.
The “Magnificent Seven” (Apple, Amazon, Alphabet, Meta, Microsoft, Nvidia and Tesla) are considered key beneficiaries as they train generative AI programs to enhance their existing businesses, or move into new business lines.
In the real assets sector, the standout companies set to benefit from the AI structural tailwinds are the operators of Data Centres (DCs).
DCs own or lease land on which they build Data Centre warehouses, which they then lease to large wholesale tenants (hyperscalers: predominantly large cloud hosts such as Azure, AWS and Google) or to numerous smaller retail tenants.
The DCs provide storage, power, cooling and cross connection cabling, while tenants provide their own equipment. Considerations, in terms of location, include access to power (DCs consume 2% of global electricity currently, potentially increasing to 4% by 2030), and proximity to populations / subsea cable landings (to reduce latency).
Tailwinds for the industry include the digital revolution (global internet data demand is up 60 times compared to 2010), cloud computing (with hyperscalers renting space from the DC players as well as owning their own) and from AI.
These tailwinds are benefiting DCs in the form of a strong rental market (digital realty has increased rents nearly 70% over the past 12 months) and development opportunities (seeing circa 15% cash yields).
Currently, generative AI training is taking place in DCs in more remote locations, whereas customer-facing applications are expected to drive demand for DCs closer to populations and fibre connections.
AI is still in the early stages but is already driving incremental demand for DC space. Notably, AI has about 10 times the power intensity of conventional computing, and power access is a constraining factor for DCs – so this is driving the development of new DC facilities, and elevated rents / development margins.
The large stock-exchange listed Data Centres are Equinix and Digital Realty in the US, while in Australia we have Infratil, Macquarie Techno, NextDC and, increasingly, Goodman Group investing in data centres. Milford has investments in several of these names.
These companies’ share prices have performed strongly in recent times on the positive themes discussed. The investment equation from here requires balancing a strong business outlook with these now higher valuations.
