Around the world, colo players such as Switch, Equinix and Digital Realty have put forward billions of dollars to build the data warehouses to host businesses’ data and the IoT data streams that are predicted to generate 403ZBs of data by 2018, up from 113.4ZBs in 2013.
This is leading to the erection of data centres everywhere in the world with the data centre infrastructure equipment market predicted to exceed $135 billion this year and grow 8% according to market watcher Canalys.
With so much going on in this market space, the question remains: who are the real estate investment trusts (REIT) with the funds to invest in more expansion, and where could they be possibly looking to tap into next.
The London Stock Exchange says that a REIT is a single company REIT or a group REIT that owns and manages property on behalf of shareholders.
REITs are a relatively new aspect of the stock market having been created in 1960 by the US Congress in order to give all investors the opportunity to invest in large-scale, diversified portfolios of income-producing real estate.
Today, the two largest data centre REITs are Equinix and Digital Realty.
Equinix has been a REIT since January 1, 2015 following the U.S. Internal Revenue Service (IRS favourable private letter ruling (PLR) in connection with EQIX’s conversion to a REIT for federal income tax purposes.
Equinix closed 2014 with revenues topping $2.44 billion. 2015 financials are due on February 18.
For Q3 2015, the company posted revenues of $686.6 million, predicting Q4 revenues to range between $701 and $705 million.
For the full year of 2015, Equinix predicts total revenues to range between $2,696.0 and $2,700.0 million.
The other data centre REIT giant is Digital Realty Trust Inc.
Digital ‘s in 2014 reached $1.6 billion, up from $1.5 billion the year before. With Q4 2015 results set to be announced on February 24
During the 9th Finance and Investment Forum (FIF) on data centres hosted in London this January, Wendy M. Will, AVP and CFO EMEA at Digital Realty, said that what we are seeing is more financial options.
She said: "People are now more willing to invest, but it is not like pre-crisis activity. We are more open and willing to pursue opportunities. It definitely seems to be improving."
Graham Smith, director at Ares Management said that people are still trying to figure out the banking landscape post-crisis. "Things have changed. We have seen the emergence of special advisors to help people navigate in the tech space."
Other big players in the data centre space include NTT Communications, Temasek group and KDDI. Some private equity companies are also part of this list and include Silverlake, Searchlight, Sumitomo, Permira, and KKR.
Panel discussion at FIF London 2015.
Steve Wallage, MD at Broadgroup, told CBR: "We are certainly seeing some consolidation, both bigger deals and groups such as telcos divesting data centre assets, such as Verizon and CenturyLink.
"This is certainly making smaller/mid-sized players consider whether they are big enough, and also we are really seeing the benefit of global footprint."
However, Wallage also said that there is still room for smaller and more regional/country players, particularly as we will increasingly see such players with a more differentiated approach whether by vertical, offering, cloud or other/technical.
Yet, with so many billions of dollars floating around, where and how are the REITs expected to invest and how will they decide where to invest?
According to Wallage, historically, investment ideas surge by REITs being proactive and either seeing opportunities and looking for potential targets, or often, "because they see demand from existing clients".
"More recently, it has been more reactive as corporate finance/bankers push deals their way. Typically, they will develop a business and financial case, internally and with their advisors, to present to board."
Following this, there are also some key drivers that lead to big players like DLR or EQIX to invest heavy as they did when DLR acquired Telx for $1.86 billion in 2015 or Sentrum fro $1.1 billion in 2012, or when EQIX bought Telecity for $3.5 billion last year.
Wallage said: "First, there is the financial driver. Particularly for a player such as DLR who is looking at assets that meet its financial criteria, such as certain yield, covenants.
"Secondly there is the strategic aspect such as EQIX acquiring Nimbo for cloud/professional services and DLR/TelX for cloud/co-lo/interconnect skills.
"Thirdly, there is the geographic driver to both bolster positions in main markets and fill gaps. For example, for EQIX this has meant more emerging markets such as Brazil and China."
Adding to this, Wallage said that there is yet another important driver which is about the companies being defensive around their market position. An example of this includes EQIX acquiring Telecity Group (TCY) to avoid a TCY/Interxion (INXN) merger creating a European player with around twice its revs.
According to Guy Willner, CEO of colo IXcellerate, the sort of markets that REITs will be looking into for investment are markets where there is freehold ownership of the buildings, "so larger DCs and DC campuses". "Anywhere in Europe," he told CBR.
Panelists discuss data centre market trends at FIF London 2015.
As previously mentioned, a lot of the investment being made in the data centre space is being driven by the growing need for cloud services and data hosting ports amid exponential growth of IoT.
The REITs dominance could however be challenged in the months or years to come as some emerging data centre markets sharp their own colo offerings.
Willner said: "[There could be a] possible shakeup if a Chinese company arrives big on the scene."
Hitherto, we have not seen any major financial scandal or problems also occur in the data centre space. Still, with investments getting heavier and heavier on a year basis, it might just be a "question of time until someone goes bankrupt in the data centre space", Willner said in a panel during the FIF.
He told CBR today: "Like any sector there are those with experience and those who dream with no experience. A few transactions have quietly happened in US and EC where the original investor lost a large chunk of value.
"The big player such as Equinix, DLR etc have long memories and strong mgt so there is no bubble in their businesses. The government funded/promoted middle-of-nowhere DCs are the most at risk as they have a very limited market."
Nevertheless, the big REITs are expected to keep investing their money in the North America and European markets as most of the needed infrastructure is already in place.
According to Michael Tobin, OBE, Industry Entrepreneur and former Telecity CEO, who also spoke at FIF London, emerging data centre markets include Nigeria, Ghana, Keyna and South Africa, however, "you need balls of steel to invest".
In Europe, Turkey, Bulgaria, Poland, Czech Republic and Russia are also becoming an investment trend, while in the Middle East there is a "straight fight between Dubai and Oman".
However, Aniko K. Szigetvari, global head of TMT Group at International Finance Corporation (IFC) said that it does not matter what sector we look at in TMT, "it is always back to basics".
He said: "A data centre in an emerging market is probably worth less 20 to 30 billion dollars than other markets."
