Issue link: https://cp.revolio.com/i/584904
16 | THE DATA CENTER JOURNAL www.datacenterjournal.com t he real-estate markets have endured turbulent times over the past few years, as is evident from research produced by large property companies and indices such as JLL and IPD. What hasn't been well documented is the continued increase in market size of the data center sector across Europe, which has outper- formed other asset classes. Yes, uptake has been slightly subdued owing to a fall in end-user colocation demand. Ultimately, however, the operators are still building new facilities, and hyperscale end users are undertaking increasingly large self- build projects in economically attractive locations. What has been very interesting over the past six months is the consolidation of the data center sector in the European markets. We have seen the proposed Telecity and Interxion merger scuttled by Equinix, and before that, NTT Com acquired 85% of Gyron in the U.K. as well as 86.7% of eShelter in mainland Europe. Reportedly, NTT Europe is now looking at expanding its data center footprints via their colocation arms into new countries right across EMEA. So what does this consolidation mean? We have seen such activity in the past; most recently, Digital Realty bought Sentrum, a U.K. M25 wholesale operator for £750 million (about $1.1 billion), but what happened to Sen- trum's data center portfolio? It continued to grow, of course. e credentials of a new data center location are elusive to say the least, especially in established markets such as London, Paris, Amsterdam and Frankfurt. e building is just one aspect, and the risk mitigation factors are huge and proximity to power and fiber are es- sential, but without the property, the other factors are useless. e consolidation in the market has seen fresh eyes looking at existing data center portfolios, ensuring new ways to gain value from them. In addition to the real-estate asset-management opportuni- ties, the consolidation is causing the pric- ing of services to harden and thus further support the high barriers to entry for new providers. We fully expect to see further consolidation across EMEA in 2015. We believe this region is focused on the midi- wholesale sector, which is where we see the highest levels of current competition. In addition to consolidation, we have seen relatively young real-estate-backed data center operators, such as Virtus Data Centers, expanding their business portfo- lios with new acquisitions sparked by fresh data-center-led investment from STT. is situation is testament to the company's business, which has historically been real estate driven. It's an exciting time, as strong demand has returned to the data center with Alpha Real Technology report- ing demand in excess of 50 MW (IT load) across Europe. Further supporting growth in the data center sector, we have seen new data center operators form from previously acquired businesses—namely, Zenium Technology Partners. Zenium acquired data center sites in Frankfurt and Istanbul and is currently looking at a number of new locations to support demand for its build and operational credentials. e company formed from the ex-Sentrum business Digital Realty purchased in 2012. An interesting point to note is that since 2012 and 20133, we have noted a keen interest in real-estate-backed assets from institutional investment funds, with 2015 seeing the largest uptick in demand for data center products brought to market and sold. Previously, funds were unable to understand the values attributed to the locations, which, in their opinions, were central-office or outer industrial/logistics locations. We have seen this mindset change as investment funds are chasing long let/occupied stock that they need not actively asset manage. Data center occupants fit these criteria well, given their secretive and sticky attributes. It is important to note that at this point in time, the funds are only investing in the shell or powered shells: essentially, the underlying real estate plus the benefit of the enhanced MV power. e occupants are then responsible for deploying the cap- ital to build out the M&E infrastructure. e institutional market has failed to gain enough confidence to invest on a fully fit- ted basis, nor do I expect they will anytime soon. A crucial clarity point on this matter is that I am describing institutional-fund investment, not private equity (of which there is significant investment in the op- erational nature of businesses). So what does a modern data center look like? Historically, we know the data center asset was located in the heart of a city near the main fiber PoPs, usually in a retrofitted building. Since the late 90s and early 2000s, and especially aer 9/11, the disaster-recovery market has emerged, and it has tended to reside on the outskirts of a city to provide a resilient pair to the cen- tral third-party/office data center. We have seen hundreds of thousands of net techni- cal square feet built across Europe since the emergence of the market, and they have tended to be large industrial/logistics warehouses built out in large tranches or, more recently, on a just-in-time basis. We are now seeing an x.0 type of deployment where retail, wholesale and hyperscale users are building and deploy- ing on a truly modular basis in a bespoke designed building. In some cases, they are moving away from the large industrial/ logistics warehouse buildings. One such example of this is Ark Data Centers, which uses Bladeroom—an externally manufac- tured, direct-air-cooled adiabatic solution that sits on a slab and does not need a wider building envelope. is approach is changing the dynamics of how data centers are built and deployed, but in our opinion, there will always be real estate underpinning a data center site, as even the cloud sits on core real estate! A new area of investment with regard to data center real estate is Africa. We have seen over the past six months two confidential data center operators look- ing to establish pan-African data center portfolios to take advantage of the growing domestic market and upcoming Western demand. is demand has been histori-