Given the growth of the data and cloud computing industry, wealth managers should keep a close eye on Data Centre Real Estate Investment Trusts (REITs) or properties where data is physically stored. They have the potential to appeal to not-so-risk-averse investors seeking alternative and innovative products, writes Silvana Amparbeng, wealth management analyst at Verdict Financial.
We talk about data and big data all the time, and it is the most crucial element of our digitally connected world, but where exactly is this data physically held? In brick and mortar data centres, of course.
Given that high net worth (HNW) investors in general are looking for alternative and new investment products, it comes with no surprise that Real Estate Investment Trusts (REITs) with innovative strategies are attracting increasing attention. Data Centre REITs are one such product.
Cloud computing is a buzz word, but data is not floating around in clouds. It is stored in a more tangible fashion, and as technology is having the upper hand on information management, an increasing number of properties or facilities are dedicated to storing data.
That is where Data Centre REITs come into play. In fact, they have been in the market for years.
Holding its initial public offering in 2004, Digital Realty Trust, the largest data centre REIT in the world in terms of market capitalisation, currently owns approximately 130 data centres, and has scored a CAGR of above 17% from 2015 to the beginning of 2017.
Niche but lucrative market
In general, Data Centre REITs (of which most are US-based) continue to outperform the broader REITs sector, and only in December 2016 they have registered growth rates that span from 5% to 12%.
This niche market is expected to expand even more given the positive growth forecasts for big data and cloud computing.
REITs are taking over property investment market in the US and beyond, with HNW individuals globally increasing their allocations in these products. REITs provide a high diversification of real estate investment solutions, making it a fairly stable asset class, which appeals to risk-averse investors.
This comes all to the benefit of wealth managers, as REITs – contrary to direct property investments – contribute to fee revenue.
Hang on – there are drawbacks
However, there are naturally some drawbacks of investing in REITs. Both residential and commercial property prices remain exposed to economic turnarounds. It is enough to mention the turbulence in the UK property funds market following the EU referendum in 2016.
As with each asset class and investment products, there are risks, which wealth managers should communicate to clients interested in Data Centre REITs. Despite historically providing higher returns than traditional REITs, Data Centre REITs prove to be more volatile and are not immune to the influence of external factors.
The PRISM scandal in 2013, France issuance of data sovereignty laws in 2015, and the political turmoil of the second half of 2016 all show that even the leaders of the market are able to register considerable losses.
Nevertheless, Data Centre REITs remain a good alternative for investors that are willing to take a higher risk in exchange for higher return prospects. They can successfully answer the growing demand for products from outside the standard pool of stock and bond options.