In a U.K. property market that’s seen better days, data centers have continued to garner strong demand. As demand for data storage and processing skyrockets along with artificial intelligence usage, the nuances of how this digital expansion will be financed remain to be seen.
The U.K.’s data center market generates a hefty 4.6 billion pounds (roughly $6 billion) in annual revenue. London, the epicenter of the country’s tech boom, saw an 11% increase in data center inventory in just the first half of 2024.
But the growth isn’t just a local phenomenon. Globally, financial analysis software and services provider Moody’s projects a doubling of data center capacity over the next five years. The U.K., with its robust tech ecosystem and strategic location, is perfectly positioned to ride this wave.
Since 2022, the data center market has surged by 50%, significantly outpacing the broader U.K. real estate market. With demand continuing to grow steadily, this subsector has emerged as one of the most profitable alternative investment opportunities within the real estate field. According to PWC, it’s now considered the second most desirable real estate asset, ranking just behind clean energy infrastructure.
What’s driving this appetite for data centers? AI is a significant factor. Paired with an ongoing shift to cloud computing and the rise of digital services, we’re in the midst of a perfect storm of demand for storing and processing large amounts of data.
Edge computing, a distributed computing paradigm that brings computation and data storage closer to the location where it’s needed to improve response times and save bandwidth, is also playing a role. A recent McKinsey & Co. report cited the International Data Corporation’s prediction that global spending on edge computing solutions will surge to $274 billion by 2025, up from $176 billion in 2022. This trend toward localized data processing could reshape the data center landscape, particularly in urban areas.
Yet, while the appetite for building new data centers remains strong, the scale and complexity involved in constructing new centers in urban areas like London and throughout the U.K. may require a multifaceted approach to financing. EquitiesFirst, a firm that provides equities-based financing, offers an alternative financing model that could help unlock the U.K.’s data center potential.
The Power Predicament
Morgan Stanley analysts estimate that by 2035, data centers could be consuming 4% of the U.K.’s power, up from just 1% today. In the opinion of National Grid chief executive John Pettigrew, we’re looking at a potential sixfold increase in power use by data centers over the next decade.
The U.K.’s power grid is already feeling the strain, and adding data centers to the mix could push it to its limits.
At the same time, 80% of the U.K.’s data center capacity is clustered in and around London. Proximity to major customers means lower latency, a crucial factor for many applications.
But this concentration creates its own set of problems. London’s real estate market is already tight, and finding space for power-hungry, heat-generating data centers is no small feat.
There’s a silver lining, though. The north of England and Scotland are emerging as attractive alternatives. With their cooler climates and access to renewable energy, these regions could offer a more sustainable solution to the data center dilemma.
EquitiesFirst and Alternative Financing Options
Investors have caught on to the data center gold rush. According to the McKinsey report, private equity firms, in particular, are diving in headfirst. In the first half of 2022, they accounted for 90% of data center deals, up from 42% in 2015-18.
Yet, despite the sector’s promise, there’s a catch: Developing data centers is expensive, particularly in highly populated areas like London. Traditional financing methods may not be enough to meet the growing demand for capital.
Alternative financing approaches could come into play. EquitiesFirst enables investors to use their existing equity holdings to obtain financing for more immediate investments, potentially maintaining long-term positions while gaining the liquidity to jump on new opportunities in the data center space.
Easier access to capital could support the development of data centers in the north of England and Scotland, helping to distribute the economic benefits of the sector more widely across the U.K.
The U.K.’s data center boom has implications for everything from the country’s ability to participate in the growth of the global AI industry to the future of urban development in London and beyond.
The challenges are significant — power consumption, environmental concerns, and urban congestion, to name a few. But so are the opportunities. With innovative financing solutions and government support, the U.K. has a chance to solidify its position as a global leader in the data economy.
Equities-based solutions like those offered by EquitiesFirst could accelerate the growth of the U.K.’s data center sector in several ways: potentially speeding up development, helping smaller companies and investors enter the data sector real estate market, and boosting competition and innovation.
