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Emerging trend: Data centers

• Over the past decade, the real estate sector has witnessed a significant boom in data centers due to the growing demand for data storage and processing driven by the expansion of the digital economy.
• Typically, data centers are owned and operated by large companies, including cloud vendors, banks, and telecommunications companies, or by co-location companies that lease out space and provide essential infrastructure such as network capacity, power, and cooling equipment to keep server temperatures low. Tenants typically bring their own IT equipment.
• According to a report by JLL, data centers have proven to be a lucrative investment, outperforming other property sectors with an average annual return of 13.7%, compared to 9.8% for the overall commercial real estate market. The report also highlights the resilience of data centers during economic downturns, as they are considered vital infrastructure supporting various industries and sectors.
• The growing demand for data centers has attracted substantial investment from institutional investors, including pension funds and private equity firms. These investors are drawn to data centers due to the steady, utility-like cash flows and risk-adjusted yields they offer. The influx of capital has fuelled the sector’s growth and supported the development of new data center facilities.
• Currently, the United States holds approximately 40% of the global market share, followed by Europe and Asia. The global data center market size is projected to experience a 5-year compound annual growth rate (CAGR) of 11.3% from 2021 to 2026.
• In terms of rental growth, they have exhibited varying performance based on location and market dynamics. Data centers situated in key global connectivity hubs, such as major metropolitan areas and internet exchanges, have experienced stronger rent growth compared to enterprise data centers located elsewhere.
• The performance of data center properties can be influenced by factors such as technological advancements, power costs, regulatory environments, and overall market conditions. These factors impact the demand-supply dynamics and profitability of data center investments, highlighting the importance of considering these variables when assessing opportunities in the data center real estate sector.

Our View

• The digital boom in Africa brought by the COVID-19 pandemic has led to the growth in the connectivity, mobile and internet usage thus placing Africa as a potential emerging market for the data centres.
• Further, with limited capacity for expansion in developed countries, due to acute land and capacity constraints, Africa is poised for an upward trajectory in development of data centers. The leading countries in Africa in the data center sector include South Africa, Egypt, Kenya, Nigeria and Morocco.
• Investors are increasingly attracted to data centers due to the rising demand for internet and e-business. Data centers offer a more cost-effective and efficient IT capability compared to inbuilt servers. Moreover, they provide cloud services and enable organizations to focus on their core functions.
• In Kenya, data center providers such as iColo in Nyali and IX Africa in Nairobi have emerged, along with telecom companies like Rack Centre and Teraco Data Environments. These providers have either established data centers or partnered with local providers to meet the growing demand in the country.
• Additionally, Government incentives and collaborations among data service providers are expected to drive the expansion of the sector, leading to a greater demand for data center facilities. In addition to this, the presence of policies and laws governing the sector has created a favourable environment for investors interested in data center development.
• The progression on establishment of technology and innovation parks like Konza Technopolis City and Tatu City, equipped with the necessary infrastructure, will promote the growth of the IT sector and attract companies in IT and telecommunications, including data center operators.
• As the digital economy continues to thrive, the need for data centers will increase, highlighting the importance of enhancing their capacity and infrastructure to meet the evolving demands of the digital landscape. These developments indicate a positive outlook for the data center industry.
• In conclusion, the data center industry in Kenya boosts the country’s potential to become a regional data hub and presents significant growth opportunities for investors and data centre operators to capitalize on; owing to Kenya’s strategic location as the gateway to East Africa, its political stability, government initiatives, and growing telecommunications sector.

Sources: McKinsey, DC Byte and Sterling Real Estate Advisory