Defensive Data Centres Entice REITs


The yield premium paid for data centre assets over commercial real estate has “effectively disappeared” as significant growth in the demand for data underpins investment in the sector.

Speaking at The Urban Developer’s Alternative Asset vSummit on Thursday, Centuria’s Ross Lees said that there was no longer an elevation of the yield for the data centre asset class.

Lees led Centuria’s acquisition of Telstra’s 3.2-hectare Clayton data centre precinct, finalising the $417 million transaction in August after a hard-fought sales campaign.

Valuer and data centre specialist Fraser Bentley said that Covid-19 has heightened the demand and acceptance of the sector.

“Effectively that [Telstra] deal was done at a 4.2 per cent yield,” Bentley said.

“So I think that highlights that there is no premium anymore for the fact that it’s a specialist asset class.”

Centuria’s listed industrial REIT vehicle acquired the data centre on a triple-net leaseback arrangement, retaining the telco as a tenant on a 30-year agreement with two 10-year extension windows.

Lees said that, alongside the usual metrics, Centuria looked to assets with predictable and defendable cash flows over time.

“The analysis we were using was looking at 20 per cent year-on-year growth in data storage, these numbers are very difficult to replicate in other real estate asset classes.

“Essentially, the rule of thumb is for every megawatt hour of data a centre can facilitate about $4 million of annual revenue.

“[Telstra’s] rent is around $20 million per annum, give or take, and it’s a 30 megawatt capacity facility. So when we looked at the metrics, we thought that was quite low relative to other industry benchmarks.”

▲ Major data centre owner-operators NextDC, AirTrunk and Equinix have expanded their Australian presence in 2020.
▲ Major data centre owner-operators NextDC, AirTrunk and Equinix have expanded their Australian presence in 2020.

Bentley said the key is in finding the assets and unlocking the stock, which can be particularly difficult where the majority of stock is owner operated.

“It’s not just owned by passive real estate investment trust flow like Centuria’s vehicle, it’s owner-operated groups who own the whole of what is a freehold going concern.

“We’re talking Equinex, Airtrunk, NextDC—it’s all in one, as opposed to a passive real estate investment, so there’s a lot of value in the business, not just collecting the rent.”

Bentley said that investors are still looking for the same fundamentals—strong covenants, growth, retention and the renewal probability of cash flow.

“All the fundamentals that drive most standard [real estate] investments, just driven by a different sort of metrics.”

“One thing that displays the growth in demand and maturity of the sector is that the premium of 200 to 300 basis points for the yield over standard commercial and industrial has effectively disappeared.”

Recent movement in the sector includes US data centre operator Digital Realty’s acquisition of CSR’s 8.6-hectare Horsley Park site for $84.3 million; while ASX-listed NextDC lined up a $1.5 billion bank debt issue to power its national data centre development pipeline in mid-October.

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