The standard definition provides that infrastructure forms the backbone of modern societies, driving economic growth and further development of communities. On the other hand, our economies are moving towards a hyper-connected model, with digitalisation having an ever increasing role in our daily lives as well as in determining future economic activity.
Digitalisation is nothing less than an industrial revolution and, as such, it is expected to generate structural changes in the infrastructure sector in the coming years – from its impact on underlying markets, to the consequences on the design, management and efficiency of the assets. In parallel, the development of a true digital economy will require massive capital investments, in particular when it comes to funding infrastructure, to support digital transformation and the delivery of new services.
In fact, the ongoing digital revolution can probably be compared to the electrical industry 100 years ago. Back then, companies would generate their own local power using steam and on site generators. General Electric then started to roll out the electric grid system to decentralise and connect all industries, which revolutionised modern industry. Over 10 years, power became a new utility for all industries to use on a standard tariff against delivery. We see similarities with the cloud and internet services becoming the next mainstream utility via IT and computing.
Evidently and to some extent naturally, the telecommunications sector has already experienced significant changes, with heavy investments being made in infrastructure such as fibre networks, telecommunication towers and data centres, in order to respond to the rapidly growing needs of consumers and economic actors to share and store data. In that regard, cloud computing is certainly one of the areas where new technologies have made the greatest breakthroughs.
Cloud emergence will affect nearly all facets of the IT ecosystem. Most importantly, IT solutions and services vendors will now need to adapt their infrastructure, people and processes. Businesses and consumers now demand more flexibility, scalability, cost-efficiency and ease of use from IT solutions and services. The cloud has the potential to transform some business ecosystems, especially those underpenetrated by IT due to high capital requirements, such as healthcare, education and government. These sectors are expected to witness a paradigm shift as they adopt the cloud and leverage technology, enabling both private and public services to be delivered more rapidly and transparently to a larger audience.
According to a recent study by financial services firm JLL, the cloud managed services market is predicted to grow from $35.5 billion in 2016 to $76.7 billion by 2021, a compound annual growth rate of 17 percent. Cloud adoption acceleration will double the size of the data centre industry over the next five years, driven by the investments of the top cloud providers, like GAFAs and Oracle. Three main trends are impacting data centre players in this fast growing environment: regulatory, environmental and technological.
On the regulatory side, data sovereignty laws have undergone recent changes in a number of countries, impacting the way data centre players make decisions on the location of their assets. Their objective is to meet clients’ flexibility requirements while implementing regulatory constraints aimed at keeping data inside a nation’s borders by spreading locations across several geographies. This leads to an increasing internationalisation of players, which is particularly true for large US players making acquisitions in Europe as well as US clients expanding their footprint in multiple European locations. The impact of Brexit is not yet clear and will depend on decisions made by the UK to align (or not) with EU regulation on data sovereignty, to be enacted in April 2018 for all EU citizens (General Data Protection Regulation). It could, on the one hand, accelerate repatriation of data to the UK, or on the other push foreign players to relocate their UK operations in other EU countries.
Environmental concerns, recently tackled at the COP 21 summit, are also driving fast evolution in an industry well-known for its high energy consumption requirements. Energy savings are on the agenda of all players, with advanced cooling strategies and technologies decreasing the need for redundancy assets thanks to improved planning methods and innovations such as data centre micro grids that can more precisely meet the needs of industry.
Finally, a cloud-driven market is benefiting large data centre providers looking for multi-megawatt deals, which are coming to market at a very fast pace. This trend, now clearly established in the US and Canadian markets – which have been the first to witness such hunger for wholesale space in multi-tenant data centre spaces – is now influencing Europe. It is also likely to continue in the forseeable future, driven by GAFAs and Oracle.
PUBLIC POLICIES MUST ADAPT
Before the cloud can be classed as mainstream and becomes the utility it has the potential to be, there are certain challenges such as security, data privacy and disaster recovery, to name a few, that need to be addressed. One of the most specific challenges that infrastructure is facing when it comes to digitalisation is its high degree of interconnection with public policies and regulation as a whole.
Governments’ digital agenda is much broader than infrastructure, spanning from education to data privacy as well as cyber protection. Beyond the implementation of digital policies designed to fuel economic growth, governments are also facing the challenge of adapting in real-time to the digital world as well as embracing an innovative and pragmatic policy adoption model that favours reactivity and accepts volatility and learning curve adjustments. Realising the economic potential of digitalisation would require policy makers to avoid building regulatory barriers and to foster a deeper level of international co-operation, as new technologies will increasingly require cross-border infrastructure projects, in parallel to more integrated policies at the EU level. As highlighted by recent political turmoil across Europe, public policies are likely to be the main bottleneck, as innovation moves faster than legislation.
AN INFRASTRUCTURE PLAY
The dynamic business environment demands high performance from technology at optimised cost. The cloud is the emergence of a new way of delivering computing services in a most efficient way and data centres are the necessary infrastructure to implement it. This goes far beyond providing a mere ‘shell’ for cloud servers, as data centres were perceived in the past decade. For investors, this also means that their potential goes far beyond a real estate play.
Data centres have infrastructure asset characteristics: they provide recurring cashflows on a long-term horizon due to significant switching costs; protection against inflation through the right contractual approach; and limited correlation with financial markets, given the growth of the data produced, which is independent from the economic context. Data centres may also generate yield and provide interesting diversification to a portfolio of infrastructure assets thanks to their very strong underlying growth.
With its high degree of segmentation, the data centre market is composed of all sorts of assets, meeting a broad range of requests from customers – from large companies hosting their most critical data to individual users storing their pictures. For instance, in the segment of large public co-location, NGD, Europe’s largest data centre, is establishing its leadership for customers with an increased focus on costs, looking to outsource large capacities of non-latency-sensitive workloads, as well as for US and Asian cloud providers on the back of data sovereignty regulations.
Located in Wales, this 750,000 square foot data centre benefits from very high safety standards, with a Tier III+ quality design. It is connected via geographically redundant fibre from several providers, is 100 percent powered by renewable energy sources and has a direct 180MW private electricity connection to the national grid. At the same time, its location provides cost advantages across rent, power and personnel, on top of continuously dropping connectivity costs.
NGD has long-term contracts with blue chip companies among public cloud operators, non-financial enterprises and system integrators. It is becoming the UK hub for one of the leading US cloud providers, which has been convinced by NGD’s ability to quickly deliver additional data storage to cope with growing consumer demand. Backed by Infravia Capital Partners, NGD is a good example of the development of a strong infrastructure investment thesis and of a fruitful partnership between an infrastructure fund and an entrepreneurial data centre management team, with the objective of building a high-performing data centre campus in Wales.
Cloud computing could arguably become the next revolutionary wave. As Nicholas Carr, of MIT Technology Review, summed up: “The Big Switch can be summarised as the shift from in-house computer systems to cloud computing as the world rewires with fibre.” In fact, the scalability and elastic nature of the cloud holds promise for organisations, not just for altering the way they manage IT, but also transform their businesses.
Over and beyond the cloud, an investment at the right position within the digital value chain (smart meters, telecom towers, etc.) could offer an infrastructure investment profile, while also giving access to the growth generated by global digitalisation.