SGX Market Updates

REIT Watch - Data Centre S-Reits Under Spotlight as Investors Look for Ways to Ride AI Wave

Publish date: Mon, 04 Sep 2023, 09:51 AM
Data-centre-focused S-Reits’ top tenants

INVESTMENT in artificial intelligence (AI) is booming worldwide – the frenzy fuelled by the release of ChatGPT last November has led to a surge in demand for data centres as well as the real estate investment trusts (Reits) that invest in them.

US-based chipmaker NVIDIA was a key beneficiary of the buzz recently, as a graphics card processor for AI applications such as ChatGPT. NVIDIA shares marked an intra-day record high on Aug 24 of US$502.66 per share two days after the company’s earnings exceeded expectations.

NVIDIA’s founder and chief executive officer Jensen Huang said: “A new computing era has begun. Companies worldwide are transitioning from general-purpose to accelerated computing and generative AI.”

According to JLL Research, the rise of AI will bolster demand for data centres worldwide, the firm said in its 2023 outlook – the rise leading to increased data usage and improved computing efficiency.

Rapidly expanding data needs are seen to accelerate growth and drive investor interest, even as headwinds persist, JLL said.

Singapore Reits with substantial data centre assets include Keppel DC Reit (KDCReit) and Digital Core Reit (DC Reit). Other S-Reits with data centre exposure include Mapletree Industrial Trust and Ascendas Reit.

KDCReit manages S$3.7 billion in assets, which include 23 data centres across nine countries as at Jun 30, 2023. Its investment strategy is to principally invest, directly or indirectly, in a diversified portfolio of real estate assets primarily for data centre purposes, as well as real estate and assets necessary to support the digital economy.

In its August 2023 presentation, KDCReit said that its demand was underpinned by strong market fundamentals, with the growth of generative AI applications such as ChatGPT and Bard seen to “accelerate demand for data centres and help push for facilities with higher power density”.

In its H1 2023 financial results, KDCReit saw its gross revenue rise 3.6 per cent year on year (yoy) to S$140.5 million and net property income increase 3.3 per cent yoy to S$127.4 million. Its distribution per unit (DPU) rose marginally yoy from 5.049 cents to 5.051 cents.

KDCReit pointed to forecasts by Structure Research that predicted the global data centre colocation and interconnection market will grow 12 per cent yoy to US$72.7 billion in 2023.

Continued expansion by hyperscalers, growth in consumer and enterprise activities and the adoption of cloud computing, digital transformation initiatives and AI will provide support demand for data centres, it said.

DC Reit meanwhile has a portfolio of 11 data centres located in key metros in the US, Canada and Germany with assets under management (AUM) of US$1.6 billion as at Jun 30, 2023.

DC Reit also highlighted how AI is expected to contribute to “continued growth in digital spending as a percentage of global GDP”.

CEO John Stewart added that sizeable artificial intelligence requirements “began to materialise faster than expected” on the back of strengthened demand.

DC Reit however reported a lower DPU in H1 2023 that fell 6.8 per cent yoy to 1.91 US cents on the back of challenging macroeconomic conditions, with two of its tenants filing for bankruptcy.

“AI has quickly become a buzzword, and everyone wants a piece of the action,” the company said in its mid-year results briefing. “Within the data centre sector, however, the action is matching the hype.”

CapitaLand Ascendas Reit (CLAR) also completed the acquisition of its fifth data centre in the UK for S$200 million, boosting its data centre investments in the nation by 54 per cent to S$569.8 million. This would increase CLAR’s total data centre portfolio by 15 per cent to be valued at S$1.5 billion in terms of AUM.

CEO William Tay noted CLAR is “capitalising on favourable market dynamics” to scale up its presence in the data centre sector.

Source: SGX Research S-Reits & Property Trusts Chartbook.

For more research and information on Singapore’s Reit sector, visit here for the monthly S-Reits & Property Trusts Chartbook.

REIT Watch is a weekly column on The Business Times, read the original version.

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