Hedge fund manager Jim Chanos hit the headlines a few weeks ago when he declared that he was taking short positions against real estate investment trusts which own data centres.

Chanos told the Financial Times that data centre REITs were his “big short right now”. He argues the trusts are overvalued and that the cloud companies which are their major clients will take their business. The cloud giants: Amazon Web Services, Google Cloud and Microsoft Azure are all building their own data centres as well as leasing space with data centre REITs or private owners of centres.

Most of the value of data centres accrues to the tenant, not the owner of the real estate, says Chanos, due to the high cost of servers and other equipment owned by the tenant. The real estate margins will be squeezed over time due to the dominance of the cloud companies.

If Chanos is correct, his thesis not only undermines data centres REITs and their investors, but also the many private real estate funds and platforms which are targeting the sector. However, there are reasons for real estate investors in the sector, especially those targeting Asia, to be optimistic.

Jack Harkness, Director, Regional Industrial & Logistics, Asia at Savills, says: “The sheer scale of demand for data centre space, especially here in Asia, where the market is less developed, means there are still good opportunities for real estate investors in the data centre space.

“Delivering data centres still requires specialist real estate knowledge and often this needs to be very local. Real estate investors have a role to play in delivering the assets the digital economy requires to grow.”

Here are five reasons why real estate investors will still play a role in the data centre sector:

1: The scale of the opportunity

The demand from cloud companies and other organisations looking for data centre space is huge and growing, particularly in Asia Pacific, where the market is less developed. For example, Savills research shows Japan (207) has fewer data centres than Australia (279) despite having four times Australia’s GDP and nearly five times its population. This disparity suggests there is huge growth to come. Developing nations such as India and Indonesia are even more underserved. Meanwhile, Asia has homegrown cloud companies, such as Tencent and Alibaba, who offer diversification for landlords.

2: The need for real estate knowledge

The equipment in a data centre might be more valuable than the building, but that does not mean real estate fundamentals such as location and build quality have no value. When cloud companies are looking to expand rapidly, real estate knowledge and contacts will be required to find and secure the best sites, secure power supply and create the best assets. Local real estate market knowledge is even more important in developing Asia.

3: The importance of collaboration

Landlord and tenant relationships are increasingly collaborative, so the relationships between cloud companies and data centre owners are important to both sides. Collaboration can help cloud companies meet their wider ambitions, for energy efficiency and net zero targets, for example.

4: Focusing on the core business

Chanos is correct to say that most of the value of a data centre sits with its tenant. That is why tenants tend to prefer to concentrate on their core business and leave the real estate to specialists. However that does not mean asset ownership has little value. In a recent research report, DBS Group said: “Cloud providers are large and sophisticated technology companies that are in the business of driving profits from their core expertise and not as data centre operators.”

5: The data look good so far

Data centre tenants might not be onboard with Chanos. Digital Realty, a data centre REIT, said its leasing revenue rose 30% from Q4 2021 to Q1 2022, suggesting strong demand for its space. Structure Research predicted Asia’s data centre market will grow at more than 12% per year in the five years to 2024. Growth is expected from different types of data centre, not just cloud centres.

Further reading:
Savills Asia Pacific Data Centres Spotlight

Contact Us:
Simon Smith | Jack Harkness