President Trump’s visit to Britain blended centuries-old pomp, pageantry – and an investment bonanza into the technology of the last half of the 21st century.
Three members of the ‘Magnificent Seven’ of US tech – the Google group Alphabet, Microsoft and Nvidia – are committing billions to the UK through the Tech Prosperity Deal to strengthen transatlantic ties in nuclear energy and artificial intelligence (AI).
Their bosses believe Britain could become an AI ‘superpower’.
If you’d like to back the transformation in which these billionaire tycoons are placing their faith, then you should consider data centres.
The revolution cannot happen without a sufficient supply of these gigantic sheds crammed with the servers, storage equipment and other kit that provide computing power.
As James Carthew, head of investment company research at QuotedData, points out, an AI search requires ten times the energy of a normal search.
Top Trump: Thanks to the AI boom, the number of UK data centres could increase by 20 per cent, spurred by the ambition to reach six gigawatts of capacity by 2030
Mark Brennan, manager of the Guinness Global Real Assets fund, reckons that there could now be a ‘step change’ in demand for these vast structures.
About 500 have already been built, catering for Amazon and other supersized players in cloud computing. Now, thanks to the AI boom, the number of UK data centres could increase by 20 per cent, spurred by the ambition to reach six gigawatts of capacity by 2030.
The Magnificent Seven’s vote of confidence coincides with the latest influential Bank of America fund managers’ survey, showing the US love affair with UK stocks has cooled due to alarm over the what might be in the Budget.
But Microsoft boss Satya Nadella is taking a long-term view, convinced AI could boost the UK economy as much as 10 per cent in five years.
Jensen Huang, chief executive of Nvidia – the microchip behemoth – is almost as upbeat, saying this week: ‘You’re in pretty good shape. You just gotta decide to go and build it.’
CAN THEY BUILD THEM?
Ben Barringer, global head of technology research at Quilter Cheviot, says the move by the Magnificent Seven members underlines British AI expertise.
But he adds that the benefits could take time to materialise.
Data centres require copious amounts of cabling for connectivity and water for cooling (although some achieve this in other ways).
Brennan comments: ‘Existing grid and generation infrastructure was not designed with the current AI revolution in mind. There are land, planning and construction challenges.’
FIELDS OF OPPORTUNITY
Fortunately, some Reits (real estate investment trusts) have already got started.
Tritax Big Box specialises in logistics units, but it has acquired Manor Farm – a 74-acre site near Heathrow on which will arise a centre of ‘data halls’ across three floors. A joint venture with EDF Renewables will deliver low carbon and renewable power.
A second centre is also proposed on this plot. Carthew highlights the £59m in rents that Tritax could earn every year from these gigantic structures.
Despite such a prospect, the share price of this £3.5billion trust is at a 27 per cent discount to the value of its net assets, which suggests it could be a bargain route into the data centre boom.
The current price is 142.3p. Analysts at JP Morgan have set a target of 180p. The Goldman Sachs analysts’ target for Segro has just been raised from 690p to 730p, against 636p yesterday.
This suggests optimism over this Reit’s project in Park Royal, London. Its three floors will be fully fitted out, which Segro – once Britain’s largest landlord – hopes will attract a higher income.
Segro’s other 34 data centres in its heartland of Slough and London are ‘powered shells’, where customers such as Amazon equip themselves in return for a lower rent. The other assets of this £8.6billion FTSE 100 trust are mostly urban or ‘big box’ warehouses.
If you would like to have some exposure to the construction frenzy elsewhere in the world – consultancy McKinsey estimates that $7trillion (£5.2trillion)will be spent on these buildings by 2030 – you could look at some other investment trusts.
Carthew highlights Cordiant, which specialises in Belgian data centres. It may be at a 27 per cent discount but the dividend yield is 5 per cent, compensating for the risk.
Pantheon Infrastructure is at a less formidable 9.2 per cent discount. This trust – known as ‘Pint’ – has assets in Europe and the US, including a stake in the American data centre giant CyrusOne.
It announced this summer a project in Iver, Buckinghamshire, that will be ‘fully integrated into the landscape’ – recognition that opposition to development could become a factor.
There is already controversy about water use. But energy may also become contentious.
National Grid expects that, by 2030, 6 per cent of electricity demand may be from data centres, against just 1pc at present. Some even fear this could drive up fuel bills, stirring public discontent.
On this basis, putting money into a trust whose holdings are energy companies could make sense.
The portfolio of the Ecofin Global Utilities and Infrastructure trust includes National Grid, SSE and the US NextEra Energy, which provides renewables to insatiable US data centres.
A SURFEIT OF HUBS?
There is a temptation to be over-optimistic about returns.
The US ‘hyperscalers’ – Amazon, Alphabet, Microsoft, Meta and Oracle – seem willing to splash out considerable sums on these assets, either to put up their own centres or sign leases with operators. These tech giants are borrowing heavily from private equity.
But if you are resolved to take advantage, you should also factor in the apprehension surrounding this construction boom.
It is possible that this could turn into a bubble if the productivity and other gains promised by AI turn out to be just hype.
Among those warning of such an outcome is Sam Altman, boss of OpenAI, the US tech group that developed the groundbreaking AI system ChatGPT, which has 700m users worldwide. Altman swung by London this week with the other tech chiefs.
In research that was published last month, Goldman Sachs analysts extolled AI’s potential, seeing evidence that it could ‘automate swaths of the global economy, from white-collar work to drug discovery, and to increase productivity’.
The demand for AI could be even greater than expected, with data centres that were put up before the advent of AI becoming unsuitable for the workload and not able to be retrofitted.
Even so, these analysts stressed they were on ‘heightened alert for any signs of market weakness’.
This seems like a really sensible stance for any investor.
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