Data centre Reit's are the hottest global property micro-markets!


Data centre Reits are the hottest global property micro-markets!

Published: Sun 14 Jan 2018, 4:15 PM

Last updated: Sun 14 Jan 2018, 6:18 PM

I am fascinated by the impact of technology - ride hailing apps, Big Data, driverless cars, smart grids on property markets worldwide. For instance, only 2 per cent of all taxi rides in the Middle East emanate from ride hailing services like Uber and Careem? Dozens of Mena cities do not even have access to such services. Yet I believe on demand mobility will be ubiquitous in a decade even as electric, driverless cars replace the gas guzzlers clunker fleets in our region. Now that Saudi Arabia has doubled petrol prices, who in his right mind will drive across the Los Angles scale sprawl of Riyadh or Jeddah in a Nissan Patrol/Armada or, God forbid, a GM Suburban? What will this mean for land and home prices in the kingdom's major cities?
Data centre real estate in the US, Europe and Asia are of obsessive interest to me, as both an investor and student of global technology trends. Take data centre Reits, for instance. Their tenants are the crème de la crème of Silicon Valley, the world's finest credits. Their complex fit outs mean long life leases linked to inflations. Their fiber optics networks class, the digital backbone of e-commerce, cloud computing, biotech, Big Data analytics, robotics and artificial intelligence. These are the tectonic megatrends that will define the rest of our lives and have a seismic impact on property investing worldwide.
When I addressed a recent investor dinner, a member of the audience asked me if all this was positive for Silicon Oasis. I was truly stunned and a loss for words at his conclusion. I can easily envisage a future where there will be hundreds of server farms in vast data centers in Silicon Oasis, (though Skype/VOIP will remain blocked and even illegal) that will power the Gulf's transition to the Digital Age. The biggest shopping malls, taxi fleets, banks, insurers, stockbrokers, gold retailers and media networks in the Arab world could all be live and trade online. I can easily envisage a future when the largest, most liquid, most profitable property investment in Dubai is a data centre Reit listed on the Dubai Financial Market. Futuristic fantasy? No. A rational extrapolation of embryonic trends in the world around me in Arabia's ultimate "Smart City".
As a property investor, I believe 4 criteria should be non-negotiable when investing.
One, it should not be a generic sector with no barriers to entry and thus vulnerable to a new supply glut. This rules out most offices, retail (Amazon is the ultimate Death Star for regional shops, malls and even brands) and homes.
Two, liquid Reits are far better investments than illiquid brick and mortar, especially in markets with 4 per cent inflation, 6-7 per cent transaction costs and high sovereign risk premiums like the GCC.
Three, the best landlords (Reits) are those who have rental pricing power and whose tenants cannot easily move.
Four, sectors that are high secular growth oligopolies. Data centres and medical laboratory Reit's perfectly fit all these criteria, even if these puppies simply do not exist in the Middle East property and stock market. But one day they will. That much, at least, is certain.
My quest is for real estate investment trusts (Reit's) with intrinsic competitive advantage, ability to acquire mispriced assets, access to cheap financing and power to raise rents/net operating income.
The average property developer is clueless about building state of the art data centers on a global scale. These are hugely expensive, complex construction and fit out projects, with vast cyber security protocols, access to electricity/fiber optics infrastructure. If done right, net operating income for a start of the art data centre is one third of its building cost. The result? Oligopolistic industry structure and landlords who print money I can easily model a property micro-market segment that can well deliver 20% compounded annual growth in the next decade.
As I data crunch the numbers, the potential is unreal. As AI powered robotics and driverless cars mean a quantum surge in daily data traffic, possibly as much as 5,000 times current usage. The human mind is not hard wired to grasp the implication of exponential growth curves, the logic of phenomena like Moores Law or the Cambridge mathematician Ramanujan's effort to model infinity. At least, my mind is not. Yet one thing I know. This will be the most fascinating and profitable property investing niche in the next three years. For a property investor, the price of ignorance will be just far too high!

By Matein Khalid

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