A Mission Critical Market Update: EU & UK
How has the transition to post-pandemic life impacted the mission critical market? Join Structure Tone London’s business development director, Richard Irwin, as he gains insight into the UK and European data centre markets from three mission critical experts: John Wilson, Director at SMBC and specialist in data centre financing, Will King, Managing Director of DC Byte, and Jason Monks, Mission Critical Project Director at Structure Tone Dublin.
Richard IrwinBusiness Development Director, Structure Tone London
John WilsonDirector, SMBC
Will KingManaging Director, DC Byte
Jason MonksMission Critical Project Director, Structure Tone Dublin
Welcome to Building Conversations, a construction podcast powered by the STO Building Group on today’s episode Structure Tone London’s business development director, Richard Irwin, speaks with three mission critical market experts. Join John Wilson, director at SMBC and specialists in data centre financing, Will King, managing director of DC Byte, and Jason Monks, mission critical project director at Structure Tone Dublin, to hear about the state of the data centre market in the UK and across Europe today, and what to expect in the future.
Richard Irwin (00:54):
Hello and welcome to this STO Mission Critical podcast. Today, we’re going to be looking at the European market dynamics, what’s been happening over the last year with the pandemic and really an opportunity to discuss what the opportunity there is for new entrants into the market, where the market’s going, and some of the unique challenges that the European market brings. So today I’m joined by three esteemed guests: John Wilson from SMBC, Will King from DC Byte, our own Jason Monks from Structure Tone in Ireland. And I’ll let each of the guys do their individual introductions. So, John?
John Wilson (01:29):
Yes, of course, Richard. Hi and hello everybody. So I work for SMBC. We are a global investment bank and we provide debt financing to data centre operators globally. We do that in the Americas, in Asia, for myself, in Europe. We have full underwriting capability, which means that as projects have gotten larger, we can underwrite entire transactions and then syndicate to other banks post-closing or moving execution risks for customers. I’ve been doing this about 10 years, but should
Richard Irwin (01:59):
Wow, you’re looking young.
John Wilson (02:02):
Thank you. I was with RBS before that, focusing on the UK and then I joined SMBC couple of years ago to finance, um, and look at data centres in the European region. So looking forward to the discussion.
Richard Irwin (02:14):
Thank you well over to you, Will.
Will King (02:16):
Thanks Richard. Hi, I’m Will and I work for DC Byte. DC Byte is a research and analytics platform for the data centre industry, covering both the EMEA and APAC region at the moment and expanding into the Americas. At DC Byte, we look at all the different metrics for the industry, whether it’s supply, take-up, the type of market it is—from wholesale to retail, to the cloud and enterprise, to co-location space. We also produce custom research reports for our clients as well.
Richard Irwin (02:46):
Fantastic, thank you Will. Jason, over to yourself.
Jason Monks (02:49):
Cheers colleague. My name is Jason Monks. I’m the director for STO Mission Critical based in Dublin, Ireland. Close affiliations with the UK and some of our European partners as well. We do a lot with them. I’m on 13 years with Structure Tone and looking forward to the next 13, particularly working with Richard, who’s going to bring me lots of work over to Ireland.
Richard Irwin (03:12):
Fantastic. So finally, I’ll introduce myself. Richard Erwin, I’m the business development director for Structure Tone Mission Critical, based in London and like Jason says, I work very closely with our Irish team and hopefully bringing you lots of work in due course Jason. Right chaps, hoping to have an educated conversation and with the guests we have today, I’m sure it will be. So I thought we’d start with just kind of an overview from your perspective on the market over the last 12 months, obviously it’s brought us all unique challenges with the pandemic, but how’s that really affected the data centre market. So John, what have you seen in terms of your world?
John Wilson (03:51):
I’ll answer that from a finance perspective and then maybe Will can sort of talk about the market in a bit more detail, but from our side in the banking sector, I think that clearly the pandemic has highlighted just how important the sector is. And this has helped to focus certainly new investors and banks into the sector. Many of whom I think have shifted from more traditional forms of infrastructure investment, be that airports or hospitals or roads or whatnot. It’s certainly helpful having additional investors come into the space because as you know, Richard, there’s no one type of typical data centre, that different investors have different risk appetites, be it for construction projects, be it lease back, be it developing brown or green field sites. So having a good choice of debt and capital is pretty helpful.
John Wilson (04:44):
And I don’t think dept and capital ever is mutually exclusive. The debt follows the right equity. And we certainly followed that in the early parts of the pandemic as well when the credit markets were tightening. But certainly, there’s a lot of appetite now for capital in this space. What I would say is, there’s no substitute for experience when choosing your dept capital provider. And certainly, now we’re seeing that speed to market is key. The one thing that operators don’t have is time to educate the investors. But in summary it’s pretty buoyant and, you know, good prospects going forward towards the next two or three years.
Richard Irwin (05:23):
That’s great news for us all. And Will, have you seen the same? Obviously, you track the market very closely, not just in Europe, but in other regions as well.
Will King (05:31):
Yeah, absolutely. We’ve seen a lot of new investors coming to us for advice on the market, in a sector they haven’t traditionally looked at. I think interestingly, we’ve seen a lot of operators now starting to look at other markets as well, as opposed to just the traditional markets that you normally saw people looking at. So we’re seeing record levels of growth in the likes of Madrid, Milan, also Copenhagen, for instance, it’s not just the usual FLAP. And Dublin as well as. I think we’re seeing that now spread across pretty much everywhere and anywhere that hasn’t seen any yet, we’re expecting to come through fairly soon as well.
Richard Irwin (06:05):
So we’re all data centre people. Will, you mentioned an acronym thereby I’m very familiar with, but the FLAP—what do you mean by that?
Will King (06:13):
Apologies. Absolutely. So Frankfurt, London, Amsterdam, Paris, and Dublin, which is what has been the traditional large markets in Europe. But I think now we’re seeing other markets exceed, actually some of those already that there’s certain markets that are larger than some of the FLAP. And I think the other key when looking at these markets, as well is what of it is pure co-location space and what it is actually self-build by the hyperscalers because that can make certain markets that seem smaller actually quite significantly larger than they are.
Richard Irwin (06:43):
Will, we mentioned the different types of market segments. You know, there’s the enterprise, the hyperscalers, self-build, build to suit. Do you want to give us that little bit of an overview as to what the different market segments are and how we classify those?
Will King (06:57):
Yeah. So you say, firstly, we carve it into enterprise and co-location. As part of the enterprise market, we then define whether it’s say a financial services company or retail company, or whether it’s one of the hyperscalers. The hyperscale is being the large global tech companies and predominantly the public cloud operators. And then on the co-location side, we then split that into whether it’s retail co-location, so selling the small amounts of co-location wholesale, co-location, so large chunks of co-location, and the build to suits market, where it’s built directly, normally for a hyperscaler, public cloud operator. But the data centre is built to the specification for purely for them.
Richard Irwin (07:37):
And the typical hyperscalers would be Google, AWS, Microsoft, Facebook, Apple, potentially.
Will King (07:45):
Exactly. And then, in some markets say like, Amsterdam, for instance, which is really interesting and you’re seeing the market gets split really evenly between these different sectors. For instance, you’ve got retail co-location, which is 25% of the market, wholesale co-location which is 30% of the market, built to suit which is 17%, and then hyperscale self-built 27%. So it’s quite an evenly split market. And does that vary from market to market? It does, but we’re not aware of any market there’s quite as evenly split as that. If you look at say Frankfurt and London, they’re overwhelmingly wholesale markets. And if you look at Dublin and Copenhagen, for instance, they’re overwhelmingly hyperscale self-build markets.
Richard Irwin (08:26):
Okay, and just the wholesale co-lo, that’s—what sort of companies would be going into those sort of premises?
Will King (08:32):
The likes of Digital Realty, Vantage, CyrusOne.
Richard Irwin (08:36):
Their clients would be what? Finance institutions, people like that.
Will King (08:40):
I think anybody looking for large space, it could be the public cloud operators. Again, it could be institutions, but anyone who wants sort of large amounts, probably megawatts and above amounts of space.
Richard Irwin (08:49):
Okay. And the retail is really when you’re just after a couple of racks or something, is that correct?
Will King (08:53):
Exactly. And that would be, I think in Europe we would predominantly think of Interaxion or Equinix.
Richard Irwin (09:00):
Okay, and Jason, I suppose bringing it a bit closer to home for you. What’s the Irish market been doing over the last 12 months?
Jason Monks (09:06):
It’s very hectic still on the hyperscale. And we’ve got four of the five big hypers based here in the greater Dublin region and further expansion by all of them. And lots of articles about the likes of AWS, Google, Microsoft expansions, Facebook. The only one that we don’t have is Apple but I’m sure we’ll get them back at some stage. We’re seeing quite a resurgence in the wholesale and built a suit market, particularly the build to suit market. A lot of guys coming in building specifically for hyperscale developments are wholesale, large customers. It’s very buoyant. And I know myself and yourself have talked recently, Richard, about the volume of inquiries coming in for future developments, which gives us a lot of optimism and tying in with what John said, the next two to three years, we see a lot of development opportunities in this part of the world.
Will King (09:57):
Just to echo what Jason’s saying. There are, you know, at the moment we’re tracking the 82% of the life capacity in Dublin is self-build by the hyperscalers. And that’s 82% of 510MW. So that’s 510MW of the 621 that’s currently live. That being said, though, we’re also tracking 99MW of capacity under construction by the wholesalers and build to suit companies, which shows you how much more is coming online.
Richard Irwin (10:25):
Good news for all of us. It continues to come in. But I suppose John, to really support this growth, there’s a lot of capital has to be raised. And you mentioned before the sort of the investment models. Are you seeing a change in those investment models, you know, new operators or new people coming into the markets?
John Wilson (10:41):
If you think about how data centres are funded currently, you’ve got two components, Richard, you’ve got the equity and you’ve got debt. Typically, equity goes in first at the speculative stage and then debt, which is much cheaper. It can be accessed when, as Jason would say, a hyperscaler is secured. And if you think about what’s going on in the marketplace at the moment, it’s the operators with the best relationships with the hyperscalers, they’re basically building what they want, where they want and when they want, and typically funding these on a project by project basis. I think the challenge is how much capital needs to be spent before the hyperscaler is secured because you’ve got a lot of costs that are typically funded from equity, be that the cost of the land, the cost of permitting and the planning, and these are all necessary costs that you are required to spend if you’re going to deliver the speed to market. I think the good news is that investors now are far better educated and they understand it takes time and the impacts on the return. And then typically what happens, you see the actual quantum is being acquired by the operators that the amounts are getting so much bigger than ever before. And therefore, you need banks to take on board the whole project and then syndicate to the event. And that’s definitely the trend we’re seeing now more and more.
Richard Irwin (12:01):
Thank you. And Will, just to touch upon, you mentioned that the European geography has changed and what’s actually driving that? Why are we moving out those traditional markets?
Will King (12:10):
Yeah, I think it comes back to the hyperscalers again. So, a lot of that growth is being driven by them as their platforms expand. What we’re seeing is they’re looking to create new cloud regions and availability zones in more countries. I can’t say I fully understand exactly how they work or the reasons behind it, but we are seeing that a lot of their demand drives that growth through operators into new markets.
Richard Irwin (12:34):
Right, okay. And in terms of those traditional market sites—London, Dublin, Amsterdam, Frankfort, you know, are we seeing new hotspots or new areas inside the UK in Ireland, for example, the west coast of Ireland. I think Jason, you’ve seen some activity there.
Jason Monks (12:49):
Yeah, you’re right, Richard. We’re starting to see the region start to capitalize on the opportunities that they have, and they’re not oversaturated such as the main conurbation, whether it be Dublin, Paris, London, Frankfurt. So, you go to Cork or you go to the west coast of Ireland, there’s opportunities out there for development. The essential key things are power and connectivity lands. You can always make land available, but once you get the power connectivity, people will go there. And we’re seeing a lot of inquiries coming through that were never evident before for Cork. We’re looking at a potential development down there for a large scale user who will take a whole facility of potentially 64MW five years ago, you wouldn’t have thought of Cork. It’s got great interconnectivity, connected to Europe by a lower latency done out of Dublin. And also a lot of good connectivity on the west coast of Ireland. And with the onset of renewable energy to huge development in offshore wind capacity, we could effectively need data centres to use up some of this abundant wind power that’s going to be generated over the next five to seven years.
Richard Irwin (13:58):
So there’s actually a need to use the energy that’s been generated rather than in some regions where there’s not enough energy to actually facilitate the data centre. That’s a unique position for the west coast of Ireland. So Will, obviously we discussed Ireland, are we seeing similar things happen in the other European more mature markets?
Will King (14:16):
In the mature markets, we’re seeing the demand still concentrate in the established zones. You know, one thing that we’re seeing in say London and Frankfurt at the moment is a phrase we’re coining “power banking.” We’re seeing lots and lots of data centre operators, secure power and planning for sites, but they’re not actually bringing to construction just yet. What we’re tracking is planned capacity in London, we’re seeing 537MW. And in Frankfurt we’re seeing 576MW. So in terms of Frankfurt, that’s enough to double the size of the market, which is just a vast amount.
Richard Irwin (14:49):
That’s planned rather than actual, no spit in the ground type stuff.
Will King (14:53):
Exactly. We class under construction as being fitted out with M & E. So it could be that some of this is built, but not being fitted out at the moment. But in other markets say for instance, if we take the Madrid data centre market, we’re seeing, where these zones aren’t already established, we’re seeing new areas created. For instance, a cluster of data centres being developed in Zaragoza, just outside. So there are opportunities that may be in the newer markets, but in the established, we’re still seeing the same concentration. That being said, though, it is expected in the future that new zones will be created as they become more concentrated.
Richard Irwin (15:30):
Interesting. Interesting. And I suppose John, from actually securing the capital to deliver these, you know, if somebody comes to you and said they’re going to build speculatively, is that something you would entertain or is it very much before the capital’s released, you need to see an end client? Or is it just a trend of land bank and power bank?
John Wilson (15:50):
I think the speculative stage has historically been funded by equity as they secure the land and get all the necessary permitting and planning in place. What I would say is that, we’ve seen operators become a lot more agile in terms of not only where they’re likely to invest, but also the operators themselves and the platforms being set up through the pandemic. Now you’re seeing new platforms set up with management teams being assembled and they may be on either sides of the Atlantic and they may well be looking towards investing into Asia and back into the US or wherever. So I think the market’s become a lot more fluid and clearly this whole concept around following the hyperscaler into the new regions that Will was talking about just now, certainly something that we’re seeing. And I suppose being a global funder, having effectively the ability to deliver the same product across different regions is incredibly helpful for the operators because the last thing they want to do is to have to go and sort of separate funding in every part of the world they’re in. So having a global partner I think is pretty key.
Richard Irwin (16:56):
So if I was saying, come into Europe and I wanted to build a data centre and I needed to raise some capital and I come to you with my business plan, what’s important on my business plan? What do you want to see? For example, design team, construction partners—are they any relevance at this stage at all? Or is it all about where you’ve got your piece of land?
John Wilson (17:19):
Obviously assuming you have the right site or sites under control, absolutely. Then it comes down to the quality of the relationship you have with the hyperscaler. Then that speaks to then the management team being assembled for the platform. And also now you’ll be glad to know something that we look very hard at is the ability to deliver the product and deliver on time. So that’s all about the construction and design parties as well. And I think that’s become more relevant also to infrastructure investors who are increasingly looking at the quality of the various parties involved in order to grate the transaction and therefore think about who would be best placed to fund it as well. So yes, absolutely quality of construction, quality design, as well as quality of the management team are absolutely key to us.
Richard Irwin (18:07):
Fantastic. That’s good news for us, definitely. And Jason, and in terms of the inquiries, I suppose we’re getting in Ireland, what level of design are we actually getting when it’s coming to us or is it very speculative? I know in the past we’ve helped people secure portions of land with planning for power and being able to give that advice. Do we still see that requirement?
Jason Monks (18:29):
It’s a broad question. It’s going to be a broad answer, Richard. So an example, as a speculative development in the region has come through with very minimal design with some unknown partners looking for us to help them localize the design that’s been applied in the US successfully, but it’s very a high level—it’s concept, but the intention is to turn it into something more feasible. What a lot of the longer, more established players and particularly in the wholesale and retail market and the built to suit, there’s a lot more emphasis put into design methodology and actually designing around the end user requirements. So getting your cooling, your distribution correct for the potential tenant that’s coming in, and as that potential tenant becomes at the fine tenant and some that signed up to a lease, it’s the ability to then to take their requirements and tweak the design. It’s really everything and in the middle. I wish I could say there was a nice stage that you get things like a stage three or four, but not really applicable. And it’s all dependent on who you’re building for and who was doing the development.
Richard Irwin (19:40):
Of course, of course. And Will, you obviously have an eagle eye on the entire market in terms of companies that are coming to you today and asking for that information. Do you see the type of organizations changing or who’s interested in this market today?
Will King (19:54):
We’re seeing new entrants, absolutely. But there’s often similar people involved in it, whether that’s similar investors or similar people in the management team, but we are certainly seeing new entrants into the market. We’re seeing people come in from new regions as well. They might already have established themselves in other markets, but they’ve seen their markets become a little bit more established. So they’re looking to sort of locate in other places as well, whether that’s in the established say FLAP markets or whether that’s looking at somewhere like Warsaw or Milan, as we mentioned before. But a lot of the people we’re talking to are people you’d expect to speak to.
Richard Irwin (20:26):
And if you have an established US data centre provider and they’re coming to Europe, what advice would you give them? Will, you know this market well, what should they look out for? What’s different apart from the language?
Will King (20:39):
Well, I think I would echo some of the points already made by John and Jason there. I mean, location is absolutely key. Um, a lot of these markets geographically are much smaller than some of say the US markets. It’s similar to more places like Hong Kong or Singapore, for instance, some of them where you need to develop higher because there’s less land available. Connectivity is very different as well. It’s a lot more openly available in the US whereas it’s harder here. Every country has different regulations around power and how you secure power. So that’s different. Again, I think it’s understanding that developing across every country will be very, very different and you need local expertise in pretty much all of them.
Richard Irwin (21:18):
Fantastic. And John, would you echo that when you’re talking to people about new investments and I’ve written the question down here, what’s most important: power, location, connectivity, latency, sustainability, design, power, supply—can you rank it? It’s probably impossible.
John Wilson (21:33):
I think, yeah, Richard, I mean all of the above. All those things will be key from our perspective when we’re looking at new projects, you know, we’re looking at the life of the project. And I think certainly from our point of view, considering the location and considering the releasing risk at the end of term is certainly a consideration for us, I would say. But I would come back to what you were saying earlier in terms of, if you’re going to invest into Europe, then make sure you’ve got the right people around you. You know, the European market is a really interesting one, but it’s made up of different countries with different sensitivities and different regulations as well. So really understanding what’s required to deliver on time in the chosen location is absolutely key, I think.
Richard Irwin (22:25):
Perfect. Jason, do you have anything to add there?
Jason Monks (22:27):
I do. It’s something both Will and John said, and we’ll use the same word. I’m going to use localization. Localizing to the requirements of the development, the end user and what you can do in that market. And we see that quite a lot, particularly with US vendors coming over, whether it’s for development or supply of service, such as design, etc. You could get 80 to 90% of what the tenant wants right, but that last 10 to 20%, whatever it may depending on the design stage is key. And you need local support, local friends, a local network to navigate that. Whether it’s a power connection, a fiber connectivity, a framework agreement for supply of major equipment or literally design and construction services. Localization, I think is key for the European market.
Richard Irwin (23:17):
Yeah. Great piece of advice and definitely something that I would echo. And the great news is the next podcast in this series actually looks at design in the European market and what you need to look out for. So hold fire on that. We’ll talk a lot more next time with design companies, architects, and engineering practices. So you’re in that all day long. So, uh, so guys, I think there’s been a really interesting conversation, but I’m going to throw one more question each. Who knows what’s going to happen in the next 12 months, what happens next year? John, you’ve probably done your outlook and your forecast. So, what do we expect?
John Wilson (23:49):
We expect to see increased activity partly helped by the projects that are ongoing, but also the projects that may have got delayed in the last year. I think we continue to expect to see the industry become increasingly global. So as Will said, expect to see new locations, I think there will be strong appetite for new operator platforms to consider these locations as well across the globe. And I think you’ll also see a lot of focus and attention on where and when the hyperscalers will increasingly self-perform as well. So in the locations where they’re not, then I think speed to market for the operators will be absolutely key. And that’s something that we’re really focused on. I think also we haven’t spoken about this, but also keeping an eye on what’s going on in the Nordics as well, talking to the operators up there, they are very confident of the positive impact on demand for sites when AI really starts to take off. And I think the comment that was made to me the other day was they think this isn’t a wave that has really hit the shore yet, but now I think project size will only get bigger. And so absolutely choose the right partner, be it construction, funding, albeit advisory.
Richard Irwin (24:54):
Fantastic, and Will to you. What do you think’s going to happen next in some of the existing markets? The London market is particular, which has traditionally been really hot.
Will King (25:02):
The London market as I said, has seen huge levels of power banking. It’s also got a significant level under construction, although in comparison to what’s being power banked, that’s actually quite small. So I think expect to see more happen there. Also expect in the not too distant future to see new regions develop around London as the past becomes constrained in other parts of it. I just also echo what John said about locations. Expect to see a lot of new locations across Europe. And the moment we’re expecting 475MW of self-build capacity to be delivered this year by the hyperscalers. And that is only across seven countries. So as they expand their own footprint across more countries expect to see a lot more of that. But also I think build to suit is really going to start coming to the fore. I think it will become more and more important and as the centre and probably you’ll see wholesale as a percentage of the market diminish and build to suit becoming larger.
Richard Irwin (26:01):
Is anybody building their own data centres these days? In the banking sector, I’m just thinking it used to be the stalwart of our clients—do you see any of that?
Will King (26:08):
We are actually seeing a data centre being developed by a financial service company in Madrid at the moment, not sure if I’m aware of any others, but there is one due to be delivered this year in Madrid.
Richard Irwin (26:18):
Wow. So they still happen from time to time. Jason, in your market in Ireland, and I suppose in Structure Tone as a whole in terms of what we’re expecting to see over the next 12 months across Europe.
Jason Monks (26:32):
We’re seeing across the whole STO Mission Critical group, Richard in all our offices and probably the 50-55 offices is a catch-up from last year. Inquiries that were handbraked have been released, whether that’s on-site location, feasibility, true to construction and delivery services. We’re seeing that handbrake being lifted off, especially after first quarter of this year, it’s nearly a threefold increase in inquiries that we’re getting on Q2 of 2020, but we’ll see in the next 12 months and quite a lot of developments and design regarding on-site battery storage, on shore battery storage, particularly to do with the offshore wind development. Quite a lot of activity on that, quite a lot of permits going in for large scale battery storage, adjacent to HV stations. So we see the whole data centre becoming a campus development. So if you’ve got that HV capability to take and transmit utility power and distribute it down to DMV networks within the data centre, and you’ve got a renewable source of energy, I think that’s key for the data centre people that need to build, because we need to be more renewable as we go forward. And if you’ve got a region or a location that can give an abundance of renewable energy, but in a stable deployed format, I think that’s going to be really interesting in the next 12, maybe even 24 months in time.
Richard Irwin (27:58):
Yeah, I think we’ll definitely touch upon that in our next podcast, in terms of the design for the European market, and is it different, what are the criteria that are coming through in terms of that design, whether it’s designing for renewables just as the inability or capacity or the different, build to suit type applications we’re now seeing. So anyway, chaps, I just want to say thank you very much. It’s been a, a very enjoyable and enlightening conversation as I knew it would be. So, thank you guys. And I’ll probably just sign off and say goodbye, John, Will, Jason, thank you very much,
Jason Monks (28:32):
Gentlemen. It was a pleasure. Thank you. Cheers.
Thanks for listening to Building Conversations. For more episodes like this, you can find our podcast on Spotify, Apple Podcasts, Google Podcasts, or the Structure Tone website.