By Michael Knott

In January 2023, prevailing market sentiment indicated a shift in infrastructure fund focus, from telecommunication assets towards transport and energy sectors. However, this trend does not uniformly apply across all telecom assets classes, with the data centre market and exception.

Roland Berger attributes this divergence to the robust business fundamentals of the data centre market. These include significant growth in Megawatts (MW), consistently high utilisation rates, and the potential for operational efficiencies. Nonetheless, the sector faces notable challenges, particularly in the realm of sustainability.

This article is designed to offer a concise overview of the key dynamics shaping the data centre market in 2023 and beyond, highlighting both its strenghts and areas of potential growth.

Deal flow

Data centre transactions grew in 2023, driven by increased growth in deal flow from the Netherlands and France. Historically the UK has led Europe, and it still maintains its status as the most active market.

Underlying fundamentals

The European data centre market exhibits robust fundamentals, making it an appealing destination for capital investment. For example, in the FLAP-D markets (80% of total MW demand in Europe) supply grew 17% CAGR while utilization increased to 88%. Similarly, the secondary market grew 23% CAGR with utilization increasing to 82%. These utilization rates are reflected in the volume of pre-sold capacity to anchor tenants. Furthermore, the growth of the secondary market signals expansion opportunities and diversity beyond the traditional FLAP-D market.

Expectations of continued growth in new demand are based on three drivers:

1. Rising data consumption

Mobile data traffic continues to surge driven by rising smartphone subscriptions and average data volumes per subscription

Fast fact: Mobile data traffic in Western Europe is forecast to grow ~16% from 2023 to 2029 with MEA forecast to grow ~26% over the same period

2. Surge in GPU demand for AI

The demand for high-performance computing in AI and machine learning requires more power-intensive GPUs.

Fast fact: Globally the revenue from the sale of GPUs is forecast to grow from USD 6 b in 2022 to USD 10 b by 2026

3. Ongoing cloud transition

Cloud migration still started over ~20 years ago in 2018, yet enterprises are yet to complete their cloud journey

Fast fact: The median enterprise in Europe has only moved half their servers to the cloud

Fast fact: Estimates suggest an extra 2,000 to 2,500 MW of IT load could be needed to meet the demand for AI workloads based on Nvidia's forecast to ship ~2.5 million H100 / H200 chips

While the data centre market presents solid investment fundamentals, operators face several familiar challenges for the future. These challenges, though not new, are significant. We believe that sustainability will be the most formidable challenge for operators, encompassing both improvements in energy performance of facilities and IT equipment, and the sourcing of green energy. This is compounded by customers continuing to pass on Scope 3 emissions to operators, as they strive to meet their own net-zero targets. Additionally, the new EU directive's mandate for transparency in critical KPI reporting will expose underperforming operators, adding to the challenge. The quick solution are carbon offsetting credits, but this could become expensive, so new solutions are needed.

Conclusion

In conclusion, the European data centre market is one defined by rapid growth and emerging challenges. 2023 has witnessed significant transactional activity, with robust growth in key regions like the Netherlands, France, and the UK.

As the industry moves forward, it is clear that the path is lined with opportunities for growth, innovation, and sustainability. The ability of data centre operators to adapt to these changes, enhance energy efficiency, and contribute to broader environmental goals will not only shape their success but also define their role in the digital and sustainable economy of the future.

How Roland Berger can help

Our expertise is deeply rooted in telecommunications and technology, across the digital infrastructure domain. This spans across various aspects, including growth strategy, due diligence, and business case development for both funds and enterprises. We possess a comprehensive understanding of the industry, its challenges, and, crucially, the emerging opportunities.

Leveraging our extensive experience, we are perfectly positioned to collaborate effectively with you and your teams. Our goal is to harness these opportunities together, navigating the complexities of the digital infrastructure landscape to achieve strategic success.