Data Is The New Bronze

“In God we trust. All others must bring data.”

Let’s start this article by kicking in an open door: data will be very important in the future. These days, countless of applications run on, store, and manage data. “There we go,” you might think, “another speech on the importance of data servers. Heard this one only about a million times.”

Well, you’re not completely wrong.

This article is not about data servers, though. I believe that by now even my grandma realizes how important data servers are - and she doesn’t even know where the camera in her phone is! No, I won’t be bothering you with another article on data servers and how data is the new gold. However, it is valuable in my next story. I guess you could say it’s the new bronze. Not quite gold, but still worth your attention.

So, what is this underhyped gem I keep teasing?

Grab a coffee and let’s dive in!

Housing Data

Today, we’ll be looking at data center REITs. A data center REIT provides the infrastructure to house data servers. Or, if you want to get a bit whimsical, they’re basically the homes for the homes of our digital lives (still following?).

Well, why is this such an interesting investment? Let me split that explanation into two parts: on the one hand there’s the “REIT” aspect, and on the other hand there’s the data center aspect. Firstly, let’s tackle the basics and look at what makes a REIT such an interesting investment.

“REIT” stands for “Real Estate Investment Trust”. In essence, it’s a sort of holding that invests in real estate. The nice thing for investors is that these have to follow certain rules in order to be considered as a REIT, of which the most important one has to do with dividend payments. At least 90% of the taxable income a REIT generates has to be paid out as dividend.

The nice thing as an investor? It’s a way to put your money into something that behaves like real estate, but with far fewer headaches. There are no maintenance calls or agent fees—just consistent income and a lot more liquidity.

Think about it: a REIT generates revenue mostly from rental income - like traditional real estate. The costs a REIT faces include both operational costs - mostly related to managing properties - and financial costs, associated with (mortgage) loans. The only difference is that you as an investor “only” receive (at least) 90% of that income, before tax.

Often these REITs are also much more efficient, as management of properties is better organized, resulting in lower operational costs per unit. They often also have long(er)-term contracts, especially in a B2B setting, such as with data centers.

So… Why specifically a REIT? Well, I’ve owned a Belgian REIT in the healthcare sector for a while now. Lately, however, an offer was made. The deal didn’t go through, but it got me thinking. Nothing’s set in stone, but I figured it’s a good opportunity to explore other REITs that offer the same kind of stable income but maybe with more upside. It’s still early days, and I’ll weigh the options when the time comes.

So, with all that in mind, what makes data center REITs especially compelling?

Data Is In Demand

A little while ago, we wrote an article with Felix on data servers, and their potential. In this article, I’ll be recapping the points relevant to data center REITs. For those of you that are really into this topic, I highly recommend checking out this article.

BIG DATA & CLOUD COMPUTING

Big Data and Cloud Computing are two major drivers for the increase in data-demand. Big Data covers everything that has to do with managing and analyzing databases. More businesses start to realize that “measuring is knowing”. Database management is gaining more traction. Data analysis is a must-have for about every self-respecting firm. And this will not stop anymore. The firms that have Big Data will keep on using it, and those that don’t use it are slowly realizing they’re getting behind. Big Data is here to stay, and with that the need for infrastructure to house data servers.

Cloud Computing includes the communication of devices to each other, such as IoT, and storing data remotely. Companies like Amazon, Microsoft and Google are taking full advantage of this. Allowing third-parties to store data on their servers is a win-win business model. On the one hand, the business doesn’t have to take care of its own servers. On the other hand, companies that have “too” much server-space, can rent out this unused space. If more and more firms decide to implement this type of storing data, more and more central data servers are needed. And where are these servers placed? That’s correct, data centers!

ARTIFICIAL INTELLIGENCE

AI is projected to be THE main driver of demand for data. The computing power required to process a simple AI prompt is a lot higher than processing a simple query on a search engine. You’ve probably heard by now that saying “thank you” to ChatGPT can become quite expensive. Simply because processing that “thank you” costs a lot of computing power, and therefore dollars.

A report by S&P Global projects the required data center capacity to increase by 50 GW from 2023 - 2028. For comparison, from 2017 - 2022, the data center capacity has increased by 10 GW. That’s a five-fold increase in capacity growth!

Another advantage is that the data center REIT sector has only a few big players. Over the last years, a lot of consolidation has happened. The result? High barriers to enter this market, which makes it much harder for competition to step in and grab market share.

Now, this is all very cute. However, it merely explains why the demand for data could increase. It doesn’t necessarily explain why the demand for data center REITs should increase. Well, there’s one more last argument…

One that could turn data demand into data center REIT dollars.

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Moore’s Law = More Space

In the world of computer engineering, there’s a famous law called Moore’s law. In 1965, Gordon Moore observed something rather remarkable: the numbers of transistors in a dense integrated circuit doubles roughly every two years. Or - in not-nerd language - integrated circuits get more efficient. As integrated circuits are the basis for storing the 1s and 0s of data, this implies that data can get stored more efficiently. The following graph illustrates Moore’s Law visually:

Moore’s Law - Source: Wikipedia

However, Moore’s Law is approaching its limits. Why? Simple. Physics. It’s becoming physically harder and harder to place more transistors on a chip. These days, microchips of less than 10 nanometers are becoming the new norm. For comparison, a red blood cell is about 7,000 nm in diameter.

Also, gaining more efficiency is just becoming more expensive. The low hanging fruits of microchip improvement have all been grabbed. Every percent of improvement is backed by a lot of R&D these days, proven by the huge R&D budgets that big players foresee.

Of course, the death of Moore’s law does not mean that the only option is to just blindly build more data centers. Improving server design, for example, is considered a good alternative. The way servers are currently designed, mostly evolved with the gains in efficiency of the microchips, so improving this layout could be an important step forward. However, in the end, if we look at the physical reality, horizontal expansion seems like the most straightforward solutions. And the cheapest one up until today. Simply placing more servers. More data centers. More space. More opportunity.

That’s how demand for data could translate into dollars for REIT investors.

Closing Remarks

So, let’s tie it all together. We’ve seen how the surging demand for Big Data, Cloud services, and AI is putting serious pressure on data infrastructure—and how data center REITs are in a pretty sweet spot to benefit from that. Add to that the solid income structure of REITs themselves, with their built-in dividend requirements and efficient property management, and you’ve got a mix that’s hard to ignore. But the kicker? Moore’s Law is pretty much dead. We’re reaching physical limits, and squeezing more power out of chips is becoming too costly. That means more servers, more square meters, more data centers—aka, more need for the exact kind of infrastructure these REITs provide.

Now, I didn’t get into rising energy costs, but make no mistake—they matter too. Power isn’t free, and these centers eat a lot of it. But that’s a story for another day. For now, let’s just say: data isn’t getting smaller, and the buildings it lives in aren’t going away anytime soon.

That’s it for today. We’ll be back on Sunday—make sure to subscribe so you don’t miss out! Thanks for reading!

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Please note: This article includes a disclaimer regarding investment advice.

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