As a person who has been working in the real estate industry since graduating, I want to delve into the hottest subsector of this industry—Data Centres—in this article to show you how I familiarise myself with the area in which I aim to become an expert one day.
The first things I did were to read industry reports and news to get a general market sense of this sector. What do I mean by "general market sense"? It includes the global landscape of this sector, the factors that affect the investment fundamental valuation, and market saturation rate. So, in the first part of the article, I will present the "general market sense" of the sector.
After that, I typically delve deeper into a specific company in this industry to gain a more crystal picture of the sector and assess whether it's worthy of investment. Therefore, in the second part of the article, I will show you how I conduct DCF analysis on a specific data centre company.
Global Landscape
Data centre can be categorised by scale or function. By scale: Hyperscale, Edge, Micro Data Centre, and Modular Data Centres. By function: Cloud, Managed Services, Enterprise, and Colocation Data Centres. In this article, I will focus on Hyperscale, Edge, and Colocation Data Centres.
Hyperscale Data Centre: Hyperscale data centres are massive facilities designed to support large-scale cloud computing, big data, and AI applications. They are typically owned or operated by major cloud providers like Amazon (AWS), Microsoft (Azure), Google Cloud, and Facebook. As of 2023, there are over 800 hyperscale data centres worldwide.
North America (especially the United States) dominates the hyperscale data centre landscape, accounting for nearly half of the world’s hyperscale facilities (around 400+). Major cloud providers like AWS, Microsoft, and Google have their largest operations in the U.S. Virginia, Silicon Valley, Dallas, Chicago, and Seattle are the key locations.
The numbers of hyperscale data centres in Asia-Pacific regions and European countries are (200 ~ 250 and 150~200 respectively). Beijing, Shanghai, Shenzhen, Tokyo, Singapore, and Sydney are the key markets in Asia-Pacific. Dublin, Frankfurt, London, and Amsterdam are the key players in Europe.
Latin America only has 40-60 hyperscale data centres concentrating in Brazil, Chile, and Mexico. Middle East and Africa rank the last, only having 20-30 hyperscale data centres.
Edge Data Centre: Edge data centres are smaller, decentralized facilities located closer to end-users to reduce latency and provide faster data processing for applications like IoT, 5G, auto vehicles, and content delivery.
There are approximately 1,000 – 1,500 Edge Data Centres in North America, occupying around 44% of global market. Urban areas like New York, Chicago, and L.A. are the key markets. Europe has around 800-1200 Edge Data Centres, concentrating in Paris, London, Frankfurt, and Spain. Asia-Pacific has around 600-1000 Edge Data Centres, distributing in Shanghai, Soul, Tokyo, and Singapore. Again, Latin America and Middle East & Africa are in the last tier, both occupying around 10% of global market.
Colocation Data Centre: Colocation data centres, also known as "colo" centres, are third-party facilities where multiple organizations can rent space for their servers and IT equipment. The data centre provider maintains the infrastructure (power, cooling, security), while the tenants manage their equipment.
colocation data centres can be either hyperscale or edge data centres, depending on their size, purpose, and the type of clients they serve. For example, Equinix’s xScale facilities are hyperscale data centres designed specifically to support cloud giants while providing colocation services and providers like EdgeConneX and Vapor IO operate colocation edge facilities to support applications requiring low-latency processing.
35% of colocation data centres (1,500 – 2,000) are distributed in North America. 26% are in Europe and Asia-Pacific. Equinix and Digital Realty dominated in every region and CyrusOne is one of the key players in North America.
The factors that affect Data Centre Fundamental Valuation
1.Location
Since the data centre investment belongs to the real estate investment sector, you can imagine the first big factor is location!!!
Proximity to End Users: For edge data centres, location near major urban centres or industrial hubs is critical for reducing latency and serving users efficiently. A well-placed facility often commands higher valuations.
Access to Connectivity: The number of fibre optic networks, availability of low-latency connections, and peering options in the area can significantly boost a data centre’s value.
Land Value: In urban areas or strategic locations (near cloud regions, submarine cables, or business hubs), land value will drive up the overall valuation of the data centre. However, high land value can also suppress demand or cause demand spillover to surrounding areas. Take NYC as an example. New York City has some of the highest real estate prices in the United States, particularly in Manhattan. The combination of high land values, expensive construction costs, and increased operating expenses (e.g., taxes, labour, power) has made building or expanding data centres within the city less financially viable. One of the most significant spillover effects from New York City’s high real estate prices is the growth of New Jersey as a major data centre hub. New Jersey is close enough to New York City to meet the low-latency requirements for financial services, media companies, and other industries reliant on high-speed data processing, while offering significantly more affordable land and lower costs.
2.Power Supply and Efficiency
Power Availability and Cost: Data centres are power-intensive, and those located in areas with cheaper, reliable, and scalable power sources will often have higher valuations. Additionally, access to renewable energy sources can add value.
Power Usage Effectiveness (PUE): PUE is a key efficiency metric. The lower the PUE, the more efficiently a data centre uses energy, which can reduce operational costs and increase valuation.
3.Infrastructure and Technology
Capacity and Scalability: The data centre’s ability to expand its capacity in terms of both power and space is a key factor in its valuation. Scalable facilities with room for growth attract higher investment.
Infrastructure Quality: Modern facilities equipped with state-of-the-art infrastructure (like high-density cooling systems, advanced power redundancy, and robust security systems) are typically valued higher. Outdated or legacy infrastructure can lower valuation due to potential future upgrade costs.
4.Market Demand
Demand for Colocation or Cloud Services: Valuations are closely tied to the demand for data centre services in the region. High demand from enterprises, cloud providers, and the rise of edge computing can increase valuations.
5.Regulatory and Tax Environment
Local Tax Incentives: Regions that offer tax benefits or financial incentives for data centre construction or operation often result in more favourable valuations. These incentives can include tax breaks on property, equipment, or energy use.
Data Sovereignty Laws: Facilities in regions with strict data sovereignty laws may have more demand due to regulatory requirements for local data storage, positively impacting valuations.
Compliance Costs: Stringent regulations, such as environmental regulations or privacy laws, may increase operating costs, reducing overall valuation if these expenses are significant.
6.Sustainability
Renewable Energy Usage: Investors increasingly value data centers that utilize renewable energy sources or have clear sustainability initiatives due to the growing importance of ESG (Environmental, Social, and Governance) factors.
7.Technological Trends
Emerging technologies, such as 5G, IoT, and AI, which drive future demand for data processing, storage, and edge computing, will also factor into the long-term growth outlook and thus the current valuation.
8.Operation-level factors
Occupancy Rates: A higher occupancy rate will generally result in a higher valuation, as the asset is more fully optimised. Empty or underutilised facilities may face a discounted valuation.
Long-Term Lease Agreements: Data centres with long-term contracts (such as colocation agreements) with high-quality tenants—especially hyperscales like AWS, Google, or Microsoft—will see higher valuations due to guaranteed revenue streams.
Tenant Creditworthiness: The credit profile of the tenants also matters. Having large, financially stable companies as tenants can increase a data centre’s valuation because of reduced risk.
Profitability: Data centres with higher profit margins (after operating expenses, power costs, and maintenance) will command higher valuations. Investors look for facilities with high EBITDA margins and sustainable cash flow.
9.Macroeconomic Factors
Interest Rates: Data centre investments, like most real estate assets, are sensitive to interest rates. Higher interest rates increase the cost of financing, potentially lowering the valuation.
Inflation: Inflation can increase both operational costs (such as energy) and construction costs (materials, labour), which may impact the profitability and valuation of data centres.
Geopolitical Stability: Political risk, currency fluctuations, and local stability will affect valuations. Data centres in regions with geopolitical uncertainty may be discounted due to increased risks.
Market Saturation rate
To analyse which areas have higher potential for better investment profitability, we should look into the market saturation rates. A high saturation rate typically implies that the market is approaching or has exceeded the capacity needed to meet demand, making it more challenging for new entrants or expansions to be profitable. Vacancy rate, rental growth, and development pipeline are the primary factors we can evaluate to assess saturation. In this article, I will focus on Northern Virginia, Northern California, and Indonesia.
Northern Virginia
The Northern Virginia data centre market, particularly cantered around Ashburn, is the largest and most mature data centre market globally. This region, often referred to as “Data Centre Alley,” is the primary hub for cloud services and hyperscale data centres in the U.S. As of 2024, Northern Virginia has over 2,000 megawatts (MW) of commissioned power, making it the largest data centre market by capacity worldwide.
The Northern Virginia data centre market, while the largest in the world, is not yet fully saturated, but it is approaching high saturation in certain areas. We can tell that from the extremely low vacancy rate, which indicates an extremely tight supply. However, As Ashburn becomes more congested and expensive, there is spillover demand to neighbouring areas like Loudoun County and other parts of Virginia, where land and power are more readily available. This is a sign that while Ashburn may be approaching saturation, the broader Northern Virginia market can still accommodate growth.
Northern California
The Northern California data centre market, particularly in Silicon Valley, is facing signs of high saturation, though it remains a highly active and strategic location for data centre investment. The vacancy rate has a sign of bouncing back to 2020’s level and the rental rate seems to reach the plateau. Also, the region's power supply, particularly in cities like Santa Clara and San Jose, is limited. Power providers like Pacific Gas & Electric (PG&E) and Silicon Valley Power (SVP) face challenges in meeting new demand, and the grid is expected to remain constrained until 2025. This makes it harder for new data centres to be developed, further driving saturation.
Indonesia
For the Indonesian market, I couldn’t find much information about vacancy rates and inventory online, so I can only provide a general overview. The reason I selected this market is that I noticed multiple big data centre companies, like Equinix, are significantly increasing their capital to expand data centre development in Indonesia. This is a clear sign of a low saturation rate, and I want to understand the drivers behind this trend.
Indonesia has the largest population in Southeast Asia with over 275 million people and a large portion of Indonesia’s population is young with median age of 30.1. Plus, Indonesia’s middle class is expanding. This creates a mass consumer bases for digital services, making it an attractive market for data centres, e-commerce, and cloud computing.
Additionally, Indonesia is a gateway to Asia-Pacific area. Its geographical location makes it a strategic hub for companies looking to serve the broader Asia-Pacific region. Proximity to major markets such as Singapore and Australia enhances its attractiveness for international businesses looking to establish data centres.
Batam as a Data Centre Alternative to Singapore: Due to Singapore's moratorium on new data centre developments because of land constraints, Indonesia’s Batam Island has emerged as an attractive alternative. Batam's proximity to Singapore makes it ideal for data centre expansion.
In terms of policies, Indonesia has enacted data sovereignty regulations, which require certain types of data to be stored locally. This has driven demand for more data centres in the country, encouraging both local and foreign players to build facilities. It also has been proactive in attracting foreign investment through policies that simplify regulations and offer incentives, particularly in the technology and infrastructure sectors. This is an advantage over some neighbouring countries, such as Singapore, with more rigid regulatory environments.
Besides, Indonesia has abundant resources for renewable energy, particularly geothermal and hydropower, which could support the growing energy needs of data centres in a more sustainable way.
There’s still so much to explore in this rising sector, but I hope this part gives you a general understanding of the data centre market. In the second part, I will delve deeper into a specific data centre project and show how to evaluate it.
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