Are data centres the new promise for real estate investment in Finland?
One of the biggest megatrends of our times is digitality. Its biggest drivers for change are 5G, Big Data and the Internet of Things. The gaming industry is also growing at an exponential rate and online retailing is on a steady increase. For these reasons, and many more, the need for data centres has increased, which has also triggered the interest of real estate investors wishing to invest in them.
For several reasons, Finland is an ideal location for data centres. The cool climate, low risk of natural disasters, political stability and reliable power and data communication infrastructure all encourage choosing Finland as the host country for data centres. Finland's appeal is also boosted by C-Lion, a submarine network between Finland and Germany that enables direct connections to central Europe.
The yield requirements for data centres
Data centres are very specialised real estate, the yield requirements are equal to those for infrastructure investment. Owing to the small size of the market so far, it is difficult to determine accurate yield. These are affected by the location, the term of tenancy, the residual value of the real estate, the solvency of the operator as well as the division of duties between the operator and the real estate investor.
The location of the data centre is absolutely vital. It must be safe and secure and suitable for data centre operations. An optimal location improves the profits obtainable and lowers the risks involved. The price of the land is also a factor in the yield from real estate investment. A data centre should ideally be located where the value of the land can be expected to grow.
Real estate investors can expect stable and long-term cash flow from data centres. Typically, the term of tenancy is approximately 20 years. Data centre operators tend to be conscientious and committed tenants because relocation would be very costly and could result in disruptions in their vital operations. The real estate investor usually owns the land and the building where a data centre is located. The aim should be to be able to amortize the investment to a reasonable residual value during the course of the tenancy. The systems within the data centre are in most cases owned by the operator.
Therefore, the real estate investors are not required to have any specialist expertise, so understanding the needs that the operator's business and operations place on the real estate is sufficient. The real estate investor and the data centre operator sign an agreement on mutual responsibilities, in which the liabilities for risks for both parties are specified. From the risk perspective, the role of the operator is central. The operator should therefore be reliable, competent and have a proven track record of successful business, as the biggest risk of the data centre's operations lies with the operator.
Data centres are an exciting new real estate investment product and real estate investors will play a necessary role in the data centre markets. Currently, Telia is setting up its colocation data centre in Helsinki and Hetzner in Tuusula. Finland is also home to the mega data centres of Yandex and Google. According to a study carried out by Google, data centre business could create 33,000 jobs in Finland and the overall economic impact could reach EUR 2.3 billion by 2025. The future of data centre business in Finland looks bright.