The U.K., already Western Europe’s leader in data center capacity, is poised for an expansion in digital infrastructure. This growth, driven by the surge in artificial intelligence, cloud computing, and digital services, will require substantial investment in real estate and technology development in London and surrounding areas.
While the overall U.K. property market has been in decline for the past three years, data center real estate deals have shown resilience, with an estimated growth of 50% since 2022. The U.K. currently generates approximately 4.6 billion pounds (around $6 billion) in annual revenue from this sector. London alone saw an 11% increase in data center inventory in the first half of 2024 compared to 2023. This growth is part of a global trend. With the increasing demand for AI, projections from financial services firm Moody’s indicate a potential doubling of global data center capacity over the next five years.
However, realizing the data center sector’s full potential will require innovative approaches to both development and financing. Alternative financing solutions, like those offered by equities-based providers such as EquitiesFirst, could play an important role in supporting the sector’s growth. By providing flexible access to capital against equity holdings, these options may help unlock the U.K.’s data center potential, further supporting the country’s digital economy and its status as a leading tech hub in Europe.
Power and Location
The data center boom faces two significant hurdles: power availability and location constraints. Morgan Stanley analysts estimate that data centers could account for 4% of power demand by 2035, up from 1% today. John Pettigrew, chief executive of energy giant National Grid, has warned of a sixfold increase in power usage by data centers over the next decade, potentially straining the current grid capacity.
Location adds another layer of complexity. Approximately 80% of the U.K.’s data center capacity is concentrated in or near London, driven by the need to be close to major customers to reduce data latency. This concentration creates a space crunch in an already congested urban area.
The U.K. government’s recent designation of data centers as critical national infrastructure might help streamline development processes. However, local concerns regarding power consumption and environmental impact are expected to remain.
The challenges of power and space in the south open up opportunities in the north of England and Scotland. These regions offer access to renewable energy sources and cooler climates, which could reduce the need for energy-intensive cooling systems. With cooling accounting for about 40% of a data center’s energy consumption, investing in advanced cooling technologies may prove essential. The industry has seen rapid improvements, moving from traditional air-conditioning systems to more efficient in-row or rotodynamic heater-based cooling designs. Continued innovation in this area may significantly impact the sector’s profitability and sustainability.
Despite these geographic advantages, London remains a strong pull. The capital’s status as a global financial center and a hub for software, internet connectivity, and AI development continues to attract data center investments. The growing demand for edge computing, which requires data centers to be closer to urban centers, is also a factor. According to the International Data Corporation, global spending on edge computing solutions was projected to reach $176 billion in 2022 and may grow to $274 billion by 2025.
Investing in Data
Investors are increasingly drawn to data centers due to their potential for steady, utility-like cash flows and high risk-adjusted yields. Private equity investors, in particular, have been active in this space, attracted by growth potential amid the AI boom and the prospect of relatively stable returns.
From 2015 to 2018, private equity buyers accounted for 42% of data center deal value. Their share increased to 65% from 2019 to 2021, rising further to over 90% in the first half of 2022.
The opportunity extends beyond real estate alone. The U.K.’s expanding data center economy is likely to drive demand in related sectors, such as sustainable energy, cooling systems, construction services, and computing equipment.
Yet, despite the promise within the data sector, financing remains a challenge. Developing data centers is capital-intensive, requiring substantial upfront investment. Traditional bank financing, while still important, may not fully meet the sector’s growing capital requirements, especially given the current economic climate.
Equities-based financing offers an alternative that could unlock liquidity to fund investment in data centers and related real estate. EquitiesFirst enables shareholders to access capital while retaining exposure to their existing equity positions. This approach may allow investors to maintain long-term positions while exploring new opportunities in the data center sector.
Expanding access to capital could make the sector more attractive to a broader range of investors, potentially accelerating the development of new data centers. While large tech companies like Microsoft, Amazon, and Google have made significant investments in U.K. data centers, alternative financing solutions could support smaller companies and investors, fostering competition and innovation within the industry.
Disclaimer: This content is for informational purposes only and is not intended as financial advice, nor does it replace professional financial advice, investment advice, or any other type of advice. You should seek the advice of a qualified financial advisor or other professional before making any financial decisions.
Published by: Khy Talara
