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Economic and Market Commentary

Unlocking Alternatives: Opportunities in European Data Centres

Find out why European data centre development opportunities is one of our highest conviction views within real estate markets today.

Text on screen: PIMCO

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Text on screen: What are data centres?

Text on screen: Kirill Zavodov, Portfolio Manager, European Real Estate

Zavodov: A data centre is a building that houses the physical hardware components that enable the secure storage, processing, and transfer of large quantities of digital data.

Images on screen: Servers, hard drives, transformers, fibre cable

These components include IT gear, for example, servers and hard drives, and the equipment that facilitates its operation, for example, generators, batteries, air conditioning and cooling units, fire suppression systems, transformers, and fibre cables.

Data centres are also an income-producing real estate assets. Rather than building their own data centres to accommodate their storage and processing operations, tech companies – such as cloud service providers with significant computing and storage needs – may find it more efficient to sign a lease with a data centre owner.

Text on screen: Data centre owners provide power access and infrastructure in exchange for rent

Images on screen: Servers

The data centre owner will provide the power access and building infrastructure in exchange for rent. Unlike other commercial real estate asset classes, rent for data centres is determined by the amount of power available to the tenant, usually denominated in euros per kilowatt hour.

Text on screen: Why is the data centre space an area of high conviction for PIMCO?

In our view, it benefits from strong secular forces within the technology sector.

Text on screen: TITLE – Drivers of demand for data centres: BULLETS – Growth of internet use, Increased connectivity, Data-intense internet traffic, Migration of IT services to the cloud

For example, forces such as the growth of internet penetration, increased connectivity and the growing data-intensity of internet traffic, have translated into sustained growth in the amount of data consumed. This is estimated to grow 4-fold from 2018 to 2023.

Another driver of demand is the migration of business IT services to the “cloud,” which companies usually accomplish by working with large cloud services providers like Microsoft, Google, or Amazon Web Services that use hyperscale computing to process large quantities of client data.

FULL PAGE GRAPHIC: TITLE – Worldwide public cloud services end-user spending ($bn) The graphic on the top of the bar chart shows Hyperscale Cloud Revenue, which is expected to grow from $41 billion in 2018 to $230 billion in 2023. The bar chart following the top graphic shows total worldwide public spending on cloud services by end-users, which is forecast to grow from $176 billion in 2018 to $600 billion in 2023. The cloud services include Cloud Business Process Services, Cloud Application Infrastructure Services, Cloud Application Services, Cloud Management and Security Services, Cloud System Infrastructure Service, and Desktop as a Service.

These companies are known as “hyperscalers” and they are expected to see their cloud service revenues to grow from $41 billion in 2018 to $230 billion in 2023, which demonstrates the magnitude of this trend. These hyperscalers are also the largest data centre tenants worldwide.

One interesting feature of this cloud migration trend is its potential resilience to recession.

Text on screen: TITLE – Why the cloud migration trend is potentially resilient to recession:, BULLETS – Flexibility to scale capacity up or down as needed, Increase in IT spending to automate processes and create efficiencies

Cloud services can provide customers with greater flexibility and potential cost savings as they can scale their capacity up or down depending on their needs. Also, during a recession, many companies may actually increase their IT spending as they seek to automate various processes or create efficiencies across the firm. In both cases, greater use of cloud services can translate into even greater revenue potential for the hyperscalers and their demand for data centre capacity.

Text on screen: Why focus on European data centre markets now?

Amidst this robust demand environment, Europe as a whole is under-supplied in data centre capacity on a per capita basis, relative to the US.

FULL PAGE GRAPHIC: TITLE – PIMCO’s European data centre focus markets. The graphic shows a map of Tier 1, Tier 2, and Tier 3 Data Centre Markets:  Tier 1, shown in red dots on the map, refers to a group of Western European markets where the majority of Europe’s data centre capacity sits, namely Frankfurt, London, Amsterdam, and Paris; Tier 2, shown in dark blue dots, includes Berlin, Madrid, Milan, Stockholm, Zurich, Copenhagen, Oslo, and Warsaw; and Tier 3, shown in light blue dots, includes Athens, Sofia, Budapest, Bucharest, Helsinki, Barcelona, Lisbon, Zagreb, Prague, and Rome.

Even tier 1 markets, which generally refer to a group of Western European markets where the overwhelming majority of Europe’s data centre capacity sits namely – Frankfurt, London, Amsterdam, and Paris are currently five years behind the U.S. in terms of installed capacity. Tier 2 markets and Tier 3 markets are even further behind

In the coming years, we expect to see convergence in growth trends between the U.S. and Europe as well as within Europe for two primary reasons.

The first is the growing penetration of low-latency applications, which requires localised data storage and processing closer to the end users. The second catalyst for growth in localized data centre capacity in Europe is the rise of data protection and digital sovereignty regulations.

Images on screen: Berlin, Stockholm, Budapest, Rome

We are most excited about the opportunity in tier 2 and tier 3 European data centre markets. Here the lack of existing capacity presents considerable “white space” to build data centres and to do so at development economics that are materially more attractive than what can be achieved for data centres in tier 1 markets, or for other real estate sectors.

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