According to Savills, there is an insufficient pipeline of data centre development planned for Europe over the next three years to meet the forecasted increase in demand. Based on data from TeleGeography, Savills anticipates that the European data centre power capacity will total 9,000MW by 2025, yet it estimates that the number of data centres will need to increase by almost 2.5 times, through the construction of more than 3,000 data centres, providing almost 20,750MW, to meet demand.
Lydia Brissy, Director, European Research, Savills, comments, “Demand for data storage has been growing rapidly since 2020 and the data boom is expected to continue for at least the next five years, with circa 72% of companies globally set to be using digital platforms and cloud computing by 2026.”
As demand for data storage continues to escalate, the market for data centres looks to be showing resilience, despite a current lacklustre economic context. In H1 some $24 billion of data centre M&A deals were closed according to Synergy Research Group, with an additional $18 billion of pending deals in the pipeline for this year.
Scott Newcome, Head of Data Centres, Savills EMEA, comments, “2022 has marked a sharp entry of private equity into the industry, accounting for 90% of the global data centre M&A value. Expensive to build and to manage, data centres require scale to achieve profitability, which is why they have attracted so much private equity.”
Data centres are capital intensive assets and, to meet demand for storage, the industry is currently focusing its Capex on expanding and improving its fleet to meet demand, which is driving a rise in sale and leaseback transactions.
Savills states that prime European yields currently range between 3.6%-4.5% across Frankfurt, London, Amsterdam and Paris (the FLAP markets). And between 4.0% and 5.5% elsewhere in Western Europe.
“We expect further yield compression in the next two years as the sector will continue to attract capital from an increasingly extensive range of investors,” says Lydia.
Savills has formulated methodology to identify the most desirable destinations for data centres in Europe based on factors including the local digital infrastructure, technology, costs, demand and supply, and availability of renewable energy.
Frankfurt, London and Paris top the ranking, predominantly given their market maturity and competitive environment. Cities in the Nordics also rank highly, given the availability of green energy and relative affordability.
Scott adds, “With flourishing demand set to grow, long term income streams and security, the fundamentals of the data centre sector are solid in the backdrop of global economic uncertainty. The sector however is not immune to the geopolitical upheaval. Highly energy intensive access to power is fundamental to the operation of data centres but with the war in the Ukraine causing havoc for the continent’s energy supply, securing power is now becoming a critical challenge. For now, developers are likely to focus new projects in locations where energy is secured such as the Nordic region, which is self-efficient and green.”
