Datacentre and Fibre Insights from TMT World Congress 2024

Datacentres

Key datacentre trends and themes discussed at the conference included:

• Competitive pricing for operators: There is high demand across hyperscalers, startups and other small users. This, combined with a growth in public cloud, developments in AI, constraints on availability of space and higher interest rates and energy costs, have supported an uptick in lease pricing by 20% globally. However, as interest rates, supply chain and energy costs have also increased costs for operators, this has not translated into the same level of growth in yield. Some operators are showing reluctance to set fixed tariffs in advance and are now considering methodologies for tariff setting at the RfP stage as an alternative pricing structure, which may influence how debt and equity investors view their data centre investment models.
• Artificial intelligence: Demand for AI datacentre capacity is creating opportunities for new strategies to be developed as to rack densification, liquid cooling and other designs. While many AI use cases do not yet require low latency (as training can be allocated to low-cost centres with higher latency), this is set to change as edge AI (such as automated driving) rapidly develops. For more information on AI, see our insights hub, Artificial intelligence.
• Brownfield conversions and hybrids vs greenfield developments: The demand for datacentre capacity is high, but it is also fast. Stakeholders are weighing up the benefits of the speed of upgrading existing facilities and cooling systems to accommodate AI or implementing hybrid solutions, on the one hand, against the longer lead time for greenfield developments, in circumstances where the technology is rapidly developing, on the other. Land availability is scarce in most markets and local partner relationships take time to develop.
• Future consolidation: The challenges for greenfield developments suggest potential for future market consolidation over the next three-five years, particularly across Europe as the market matures. We are also likely to see more vertical integration in the market, as hyperscalers develop the know-how to self-build. However, hyperscalers are likely to hedge their bets – while they benefit from a broad reach in terms of geographical operations, this also comes with the challenge of developing partnerships with regional authorities, jurisdictional know-how and relationships within the local market.
• E&S considerations: On the one hand, it is accepted that digital infrastructure development is imperative for achieving the UN’s Sustainable Development Goals, which places datacentre investment squarely within the scope of investors’ green and social investment criteria. On the other hand, availability of power and water, and their use efficiency, continue to be key operational and environmental challenges for the datacentre industry. The development of environmental and social credentials for datacentres continues, as the industry searches for carbon neutral and energy efficiency solutions, and edge data centres explore social initiatives (such as local community heating options).
• Government and industry partnership: Issues such as climate change, power availability and access to residential housing can drive political decision-making and are not, on the face of it, consistently aligned with the development of datacentres. However, finding sustainable power solutions for datacentres is a key to achieving net-zero targets and connectivity is a fundamental expectation for both businesses and individuals. Long-term stable growth in a manner that meets the macro and local demands will require industry to educate and provide training to government and other local stakeholders. Cooperation and collaboration among individual players within the industry is key in this respect.
• Expansion to new markets: The industry looks to expand beyond the traditional FLAP-D market (Frankfurt, London, Amsterdam, Paris, Dublin), and start to close the gap with tier-two markets such as Berlin, Lisbon. Other cities with access to high-capacity cables from the Middle East, North Africa, and North and South America are also viewed favourably as growth markets. The Nordics, faced with latency challenges, provide an in-demand lower-cost solution for AI software training purposes. Demand for datacentres across Africa is expected to exceed supply by 300% in the coming years. However, investment in the continent will depend on the development of power efficient and climate resilient infrastructure in order to overcome the additional challenges of access to power and consistency of supply.
• Diversification of debt funding sources: The record-high demand for datacentre capacity will further increase the need for liquidity. The expectation is that commercial banks will reach their exposure limits in the near future. As this is a capital intensive industry, developers are looking for creative financing solutions to unlock more debt capacity. This may include borrowing base facilities, devco/yieldco structures, CMBS and bonds issuances. Different pockets of liquidity are available depending on the maturity of the datacentre project – for example, some institutional investors may not be able to take construction risk but will be able to finance stabilised assets. CMBS has not happened in Europe in this sector but might be seen in 2024.

While there is no shortage of demand, which will be further fuelled by developments in AI, the industry continues to face a number of challenges including power and water usage, scarcity of land and exposure to macro-economic pressures. The environmental and social issues around datacentres create much opportunity for growth, but will require cooperation and collaboration within the industry and with local government and communities. Funding and pricing structures will likely adapt as the industry matures and explores solutions to some of these challenges.

Fibre

Key issues throughout the conference included: 

• Connections: There is a renewed focus from operators as well as investors and lenders on improving customer connections, take up and densification, rather than a focus purely on network rollout. This is important for all players in the industry as they shift their focus to revenue generation.
• Over-build: While some operators actually saw overbuild as an opportunity (one large UK operator cited that in their own experience areas with multiple Altnets had higher take-up, due to the multiple marketing communications customers were receiving about the benefits of full-fibre broadband), most agreed that the scale of actual and planned overbuild in markets such as the UK has created issues for customer take-up.
• Consolidation: Consolidation is still seen as inevitable in those markets that have seen huge growth in Altnets in the recent past. For example, it was noted that the UK has over 100 Altnets, of which only five can be considered large-scale. Consolidation was seen as an inevitability and an opportunity and may trigger an increase in equity and debt financings in the space. However, it was noted that currently the cash is not there to finance acquisitions, and so a number of acquisitions are instead likely to be financed by share consideration or take the form of mergers or joint ventures. The technical issues around consolidation were also acknowledged, and would need to be addressed early in any consolidation talks.
• Access to infrastructure: Access to infrastructure and regulation was cited as being a key influence on the state of any country’s fibre market. In countries such as Spain, where there is good regulation for access to existing infrastructure and building costs are correspondingly cheap (as low as $99 per home passed), the rollout has been much better compared with countries where new infrastructure needs to be built for new networks. Having said that, some operators prefer a model where they front-load capex costs by building their own infrastructure and have low opex costs going forward (instead of having to pay other network providers for ongoing use of the infrastructure).
• Costs of build and supply: A key positive noted in the various discussions was that the costs of build and backlogs in supply chains have improved vastly in 2023. This is a direct result of Altnets focussing more on customer take-up than network rollout. Ironically, it was noted that now is the time to build, but that unfortunately (due to the state of the debt and equity markets, there is less money to do so).