Owners, often multi-billion-dollar market cap Real Estate Investment Trusts (REITs), are well placed to take advantage of the ever-increasing demand for server space. For example, Equinix currently has a portfolio of more than 220 data centres located in 26 countries and can increase occupied space when required.
The REIT owners and developers of these vast, specialist, data centres lease space to tenants for generally up to ten years, with many leases including contractual rent escalators of 2-5% per annum, lending a degree of dependability and predictability to the future income streams, as well as inflation protection. Additionally, they benefit from high tenant retention rates of around 70-90%.
The reliability of the income paid by these REITs is evident when looking at companies such as Digital Realty Trust, Equinix and Keppel. Digital Realty Trust, with customers including Facebook, IBM, LinkedIn and Comcast, currently offers a dividend yield of 3.3%, and has increased the payment for 16 consecutive years, and Equinix has increased dividends steadily since 2017. In 2021, its dividend per share was up 8% year on year. Likewise, Keppel DC – a Singapore-listed REIT with a market cap of $2.4bn – currently offers a dividend yield of 3.7%. REITs owning and operating data centres are therefore not only poised to take advantage of the huge and growing appetite for data, but also offer predictable income streams.
Historically data centre REITs have delivered returns of over 10% year-on-year for the last 6-7 years. Looking to the future, the return profile achievable depends on data centre location, with Knight Frank suggesting that in Tier 1 markets (e.g. London, Singapore, Silicon Valley) there will be downward pressure on returns, where previously a 15% internal rate of return was sought, due to competition and limited power availability. Returns closer to these levels will however be achievable in Tier 2 markets (e.g. Berlin, Mumbai, Seattle), with less competition and cheaper land, power and labour resulting in higher and more secure returns.
The VT Gravis Digital Infrastructure Income Fund will have exposure to the accelerating growth in the data centre sector via investments in global, specialist REITs, such as Equinix, Cyrusone, Digital Realty Trust, NEXTDC, and Keppel DC, providing investors with the opportunity to access this rapidly expanding sector, whilst simultaneously receiving secure and dependable income.
Matthew Norris, CFA Director of Real Estate Securities
Fund Adviser VT Gravis Digital Infrastructure Income Fund, VT Gravis UK Listed Property (PAIF) Fund