The digital services we now take for granted require faster services to support vast amounts of data usage. Behind our increasingly digitised world lies a collection of data centres to support everything from hybrid working and online shopping to the use of artificial intelligence and 5G networks. The demand for the development and expansion of such facilities has never been greater.
What are data centres?
Data centres are the infrastructure which underpin all digital activities. Almost all data flowing across the internet goes through data centres – facilities containing networked computer servers (potentially in their thousands) used to store, process and distribute large volumes of data to consumers.
Data centres are made up of various components - the building/facility, industrial/mechanical & electrical equipment, IT hardware and software. Two critical elements are power and cooling equipment (more on this below), as data centres are extremely power intensive. Power outages or operational down time due to systems losing power or overheating is a key issue facing data centre operators.
Two of the fastest growing types of data centre in the UK are known as 'hyperscale' and 'co-location'. 'Hyperscale' facilities are typically owned and operated by 'hyperscalers' such as tech giants - Amazon, Google and Microsoft etc - or financial services firms for their own business operations. 'Co-location' data centres are typically smaller facilities, in urban areas close to the end user – ideally located for storing data near to its point of origin with space made available to people willing to rent it and particularly useful for business processing applications that require high data security or real-time information.
Where are data centres found?
The number and variety of data centres is growing rapidly across the world. Europe's leading data centre markets are known as 'FLAP-D' (Frankfurt, London, Amsterdam, Paris and Dublin) – which experienced record levels of growth in 2023.
The UK's data centre market is traditionally predominantly London-based – being a hub for world-class London-based organisations and well situated for gaining access to subsea cables connecting London to the Americas. The majority of current data centre demand in and around London this year is expected to comprise lettings to single data centre tenants (i.e. hyperscalers).
There is a real lack of supply across the established data centre sites and not nearly enough new facilities being developed around London (or the other FLAP-D markets) to be able to meet the growing levels of demand. This is driving data centre owners and operators to seek out other viable sites outside the core London hubs and creating opportunities for development and expansion across the UK. To understand what is driving the market this way, we also need to look at some of the issues currently facing the data centre industry.
Key challenges for data centres
Power – the UK's national grid was not designed for the needs of today's society and is struggling to keep pace with electricity demand. This is a particular issue for new data centre requirements which are extremely power intensive – needing a reliable supply to operate and maintain sufficient cooling systems which account for a significant proportion of a data centre's total energy consumption.
Connectivity – data centres need access to resilient fibre networks. Data centres used in sectors such as financial services, also need low levels of latency. Remote sites that are close to sources of renewable power often do not have sufficient telecoms infrastructure to support the services that would be run from those data centres. This may require public investment in telecoms infrastructure.
Costs - operators are facing increased costs due to energy price hikes, rising construction costs and higher rents/land values in prime data centre locations.
Continuity of supply – delays in the components and specialist equipment required to build data centres. The industry is also suffering from a significant skills shortage.
Climate change / decarbonisation – reaching net zero greenhouse gas emissions targets driven by global and governmental policies and by the industry itself is putting pressure on data centre owners and operators to significantly adapt at pace.
These issues are certainly not unique to data centres. However, given the vast amount of power consumed and the exponential growth in demand for data centres, these issues are driving businesses to explore alternative renewable power sources including on-site power generation and to invest in facilities which are smarter and more efficient to run with zero waste on sites located in other parts of the UK.
Looking to the future
Whilst traditionally we have seen large data centre operators leasing whole facilities, the market expects to see an increase in hyperscalers acquiring land and building their own facilities to keep up with demand.
Some real estate investors are continuing the move away from the traditional office, industrial and retail asset classes and are looking at data centres as an alternative investment sector. More investment acquisitions of existing data centre assets are to be anticipated and potentially more in the way of sale and leaseback activity, as businesses look to raise capital for growth and expansion.
Power supply constraints will create opportunities for strategically located sites across the UK – particularly those with readily available energy sources and digital connectivity to attract operators. More data centre development away from large city hubs and situated closer to renewable energy power sources and favourable climate conditions where the facilities can operate most efficiently / sustainably is to be expected. Google has recently announced plans to invest in a new data centre campus outside London in Hertfordshire. However, access to sites in more remote areas may be constrained by a lack of adequate telecoms infrastructure.
In Scotland, twenty potential data centre sites have been highlighted in a report on shortlist for data centre site development commissioned by Scottish Futures Trust/Host in Scotland, Crown Estate Scotland and Scottish Enterprise. These include a mix of potential urban / rural and hyperscale / colocation sites - including the Aberdeen Energy Transition Zone (for more details see our recent blog on Net Zero information on Aberdeen) and Queensferry One, Fife – with favourable cooler climate and direct access to renewables being emphasised as attributes. Looking to the future, the industry is exploring the potential for creating underwater datacentre facilities to harness the ocean's natural cooling capabilities - which will be of interest to locations such as the North East of Scotland, renowned for its subsea technological expertise.
Reducing a data centre's carbon footprint and enhancing its sustainability and energy efficiency are top priorities for users, operators, investors and lenders. This element is expected to drive innovation and technological advances across the data centre industry and create opportunities for businesses in the data centre market as facilities require to develop and adapt to meet growing demand in a 'green' way.
Please contact your usual Brodies contact if you want to discuss this or any other matter.
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