Despite economic headwinds, generally affecting business investments downwards, the amount of global data centre mergers and acquisitions (M&A) has not been impacted so far. During the first half of the year, some $24 billion of data centre M&A deals were closed (€23 billion), with an additional $18 billion of pending deals in the pipeline (€17 billion), according to Synergy Research Group. So far, the two major acquisitions of the year include KKR Global Investment Partners buying CyrusOne for $15 billion, privatising the company and the acquisition of Switch by DigitalBridge for $11 billion (€11.6 billion), also taking the company private in an all-cash transaction. These deals represent the two highest-value acquisitions the industry has ever seen. In 2021, the acquisitions of CoreSite and QTS, each for around $10 billion (€9.6 billion), were the previous records.

Hence 2022 marks a sharp entry of private equity in the industry, accounting for 90% of the global data centre M&A value. Between 2015 and 2018, private equity buyers accounted for 42% of deal value and increased to 65% between 2019 and 2021, when the overall M&A activity boomed. Data centres are expensive to build and manage. They also require scale to achieve profitability, meaning that data centre fleets need to be expanded to keep up with the ever-growing need for data storage. This explains the massive entry of private equity in the industry.

Looking ahead, we expect to see more operators seeking external capital. As of today, most of the existing data centre stock remains owner-occupied, predominantly by a few specialised public REITs, which have been dominating the European market. This intense concentration of market players has had a catalyst impact on market liquidity and transparency.

Sale and leaseback opportunities likely to grow further as the industry is increasingly capital-intensive

In Europe, the past two years marked a step towards improved liquidity for the data centre asset class, clearly attracting large infrastructure funds and sovereign wealth funds, both seeking sustainable growth and relatively low risk whilst bringing affordable long-term capital. As the industry is currently focusing its Capex on expanding and improving its fleet to meet the demand, some operators are selling their data centres.

As anticipated in our last report, the volume of sales and leaseback transactions has increased significantly since 2020. In September, Principal Global Investors acquired the first asset of the Principal European Data Centre Fund I for €22.6 million. Located in Barcelona, the data centre (10,502 sq m – 6 Mw) is leased to AtlasEdge until August 2033. In February this year, the developer and operator Kao Data bought and leased back two prime data centres in West London, totalling 300,000 sq ft, for €119.6 million. Whilst last year, Ascendas REIT purchased and leased back from Digital Reality the Fairway portfolio for €249.4 million. The deal comprises 11 facilities; four in the UK, three each in France and the Netherlands, and one in Switzerland. The portfolio was 97.9% occupied by 14 customers, including HSBC, Equinix, BT, and Bouygues Telecom.

Over the past year, fierce competition between investors has put strong upward pressure on pricing. This month Iron Mountain bought a data centre campus development project in Madrid for €80 million. XData Properties bought it last year for a reported value of €40 million – half the price.

Prime European yields currently range between 3.6% and 4.5% in the FLAP-D markets and between 4.0% and 5.5% in other western European locations. We expect prime yields will start to stabilise next year as a result of the high cost of debt.

According to the last Emerging Trends in Real Estate Europe, data centres were in the top three sectors to invest in in 2023, following new energy infrastructure and life sciences. For reference, the industry was ranked top 10 in the 2021 survey. The fundamentals of the sectors are solid, with flourishing demand set to grow significantly in the next five years. The industry offers a long-term income stream and security. Generally, data centres have long-term contracts with some of the most creditworthy tech counterparties. Once a facility becomes part of an end user’s computing infrastructure, relocating those occupancies is difficult. Additionally, there are elements of inflation protection within contracts, either through fixed annual uplifts or CPI/RPI links.

_{Read the articles within Spotlight: European Data Centres below.}