The growth of Australia’s data centre industry over the past two years has been nothing short of amazing. The unanswered question amid this growth is whether long-term demand will be able to match all the recent supply that has come online and all the supply that’s supposed to be coming.

Data Storage and Third-Party Cloud Providers

To be sure, data centres have become an essential part of how most companies now do business. Today, most data storage has migrated from company-owned facilities to third-party data centres and/or cloud providers, including giants like Microsoft, Amazon, and Google. That movement has been the steady driver of data centre growth in recent years, turbocharged recently by demand coming from the public, which is watching streaming video, storing videos, tweeting, and playing computer games.

In Australia, the most significant data centre operators are AirTrunk, NextDC, Equinix, Canberra Data Centres, and Macquarie Telecom — with a large cast of supporting companies. Sydney and Melbourne have historically constituted about 90% of the Australian marketplace, but growth is increasing in other markets, including Darwin, Perth, Brisbane, and South Australia. The concentration of enterprise users in the Sydney and Melbourne areas is the main reason those regions have been dominant as sites for data centres. The emerging driver for these two regions is the high population of end users/consumers who demand low latency and enormous storage and computing ability for entertainment and gaming applications.

Bright Spots in Data Centres

Ironically, perhaps, one of the bright spots in the upcoming matching of supply and demand is that not all the announced supply additions may actually come to pass. If you read the announcements carefully, you will see that most of the companies boasting about adding capacity are not actually committing to do anything. In short, many of the big announcements are content-free when you dig into them. My rule of thumb is not to count on anything unless bulldozers are at the site of those making an announcement.

Data Centres as Investment Opportunities

It’s also important to understand the aspects of data centres that make them idiosyncratic real estate investments. While investor money looking for alternatives to office blocks is being attracted to data centres, investors may not understand exactly what they’re investing in. If you break down the costs of building a data centre, about 10% of the total is land, about 20% is the structure, and at least 60% to 70% of the cost comes from the stuff that goes into the building to make it a data centre, including cooling, power, security, and raised floors, for example. As a result, data centres look incredibly expensive compared with other similarly sized real estate investments, especially considering the capital costs of maintaining and running them. Maybe the closest thing to them in the real estate world are refrigerated warehouses.

Once the economics of the business are understood, the business itself is very simple: you’re selling power, space, and cooling, and maybe some value-added services, for a fixed price per month, with probably an annual bump-up for inflation. Contracts are generally long-term, usually with high-quality customers, so once a data centre is in use, it tends to be a great investment — if you can fill it with users.

Data Centres and the Environment

Finally, there is the issue of environmental impact. Data centres use a lot of electricity and often a lot of water for cooling. The challenges of being a net-zero carbon producer, therefore, are considerable. Buying carbon offsets is one way many data centre providers are trying to meet their goals, and I wouldn’t be surprised if all data centre operators, not just the largest ones, take that route.

The idea of going to solar power, which is abundant in Australia, is attractive, but it won’t be practical to colocate every data centre next to a solar farm, particularly in areas like Sydney or Melbourne. What’s more, since data centres need reliable electricity 24/7, it would be impossible to rely on solar power exclusively. As a result, there will be a continuing need for artificial offsetting mechanisms.

More work will have to be done with water usage as well, including measuring how much electricity is being used to supply the water data centres require for cooling. What’s coming from an environmental standpoint, therefore, will be more comprehensive ways to measure the total footprint of data centres, trying to manage that down to the lowest possible number, and then offsetting that with whatever mechanism the market provides.

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About Peter Wolsey

Peter Wolsey was formerly Director, Corporate Development at Digital Realty Trust Australia, where he was responsible for acquisitions, business case development, strategic partnerships, and ongoing market and competitive analysis. Earlier, he spent 19 years with Macquarie Group, most recently as a Division Director of its Corporate and Asset Finance division, where he led the establishment of their financing businesses for data centre assets. In addition to extensive experience in the Australian data centre business, he has broad knowledge of the APAC market, including pricing and demand trends.

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This article was adapted from the GLG Roundtable “Australia’s Data Centre Industry.” If you would like access to events like this or would like to speak with data centre experts like Peter Wolsey or any of our approximately 1 million industry experts, please contact us.