Europe lags behind the US in terms of installed data centre capacity, and tier-2 cities are being singled out as the natural recipient of new investment in the sector as the continent’s traditional data hubs reach a saturation point. 

Europe’s installed data centre watt per capita stood at 13.3 at the end of 2022, which is where the US was about eight years ago, Kiril Zavodov, head of real estate equity with asset manager Pimco, said during a presentation at Mipim. 

“Within Europe, the majority of capacity is actually concentrated in the so-called tier-1 markets, or places like Frankfurt, London, Amsterdam, Paris [the so-called Flap markets]. Smaller markets like Madrid, Milan and Berlin are even more under-supplied compared with the US. This is where a lot of the demand is going to go in the coming three to five years,” Mr Zavodov said. 

The European data centre market has had wind in its sails for several years now. Due to the rising demand for cloud computing and the increasing adoption of artificial intelligence (AI), this is going to be “the biggest growth phase in Europe in terms of investment, even taking into account the advent of cloud five to seven years ago”, Scott Newcombe, head of data centre advisory for Europe, Middle East and Africa at real estate services firm Savills, told fDi in September. 

If most of the capacity has developed in Flap markets so far, the time is ripe for other markets to upgrade their data centre capacity too for three main reasons, Mr Zavodov argued. 

“Number one, it is power and planning. Larger markets are becoming increasingly more constrained from the power transmission infrastructure perspective,” he said. “That infrastructure needs to be upgraded, but it takes time. In the meantime, capacity needs to go somewhere and hyper-scalers are looking to distribute more and more of their workloads towards tier-2 and tier-3 markets. Number two is scale and latency, which become very important with the rise of AI. Operators can achieve both typically by going outside tier-1 and moving more into tier-2 and tier-3 markets. And finally, it is digital sovereignty. Governments, corporates and consumers in Europe increasingly prefer their data to be stored locally. But today, only about 20% to 30% of all European data is stored and processed in Europe. The rest is processed in the US.”

To the eyes of asset managers, the sector’s appeal is boosted by the profile of its expected cash flows, which are typically secured via contracts with some of the biggest, fastest-growing and liquid tech companies in the world such as Microsoft, Google, Oracle, Meta and so on. 

It is no surprise then that some of the biggest names in asset management have been very active in the European data centre market as of late.

Among others, Canadian asset manager Brookfield unveiled plans in October to invest €2bn to expand its data centre footprint in France; Australia’s largest pension fund, AustralianSuper, announced in September that it is investing €1.5bn to acquire a significant minority stake in Vantage Data Centers’ operations in Europe, Middle East and Africa; and UK-based digital infrastructure provider Virtus Data Centres announced in September that it will invest €3bn in a data campus in Berlin, Germany. 

Overall, foreign investors announced greenfield FDI projects in data hosting and processing worth an all-time record $19bn in 2023, up from a previous high of $16.1bn set in 2022, according to data from greenfield investment monitor fDi Markets.

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