Future-proof or fall behind: European data centres face a critical test

Fundraising for Data Centres - Market complexity aligned with investor expectations?

Real Estate vs Infrastructure-Style Returns

Data centres occupy a unique position at the intersection of real estate and infrastructure, attracting a diverse range of investors with varying expectations for returns. These assets offer a hybrid appeal, drawing real estate investors with their steady cash flows and long-term leases, alongside infrastructure investors who are attracted to their potential for long-duration, inflation-linked returns.

This duality is evident in the investment strategies employed by firms managing data centre platforms, with some platforms focused on speculative edge colocation models, which involve higher risks but offer substantial equity at stake. Meanwhile, others focus on large-scale facilities for hyperscalers, securing long-term commitments with anchor tenants to ensure stability and reduce risk. 

This flexibility allows data centre developers to cater to different types of investors, from those seeking stable cash flows to those more comfortable with speculative developments.

US data centre projects are typically easier to finance, driven by strong infrastructure and clear demand, but the situation in Europe is more complex. While premium locations with high-quality connections remain attractive, regions outside these hubs often require a more speculative approach. These developments may involve higher risks, but they are essential for meeting the demand for digital infrastructure in emerging markets.

Managing Obsolescence Risks

Technological advancements, particularly in AI and high-performance computing, are evolving rapidly, and there is a constant pressure to ensure that data centres remain relevant in the face of emerging demands.

The risk of obsolescence is particularly high for short-term leases. In markets where the technology evolves quickly, such as in AI, short-term leases expose investors to the possibility that their infrastructure will become outdated before the lease expires. 

To mitigate this risk, developers are increasingly opting for long-term business models, securing long-term anchor tenants for periods of 10-15 years. These leases provide stability and reduce the risk of technological obsolescence, offering both developers and investors greater confidence.

Tenant Demand and Leasing Trends

The demand for data centres is primarily driven by hyperscalers - major cloud service providers such as Google, Amazon, and Microsoft - companies which require large-scale facilities to support their cloud operations and AI-driven infrastructure. 

These hyperscalers typically seek long-term leases (10-15 years) to ensure that they have guaranteed access to the space they need as their operations grow.

However, smaller cloud providers and tech companies may prefer shorter-term leases due to the rapid pace of technological change. These shorter-term leases create a more complex environment for developers, as they must balance the needs of both long-term tenants and those with more flexible requirements. 

While longer leases provide more stability, they also limit flexibility, which is important for companies that may require frequent upgrades to their infrastructure.

Developers are responding to this dynamic by designing more adaptable facilities that can serve a range of tenants. By creating "neutral" data centre spaces that can accommodate different types of clients, developers can reduce the risk of obsolescence and ensure a steady stream of tenants, even as lease contracts expire.

Open-Ended vs Closed-End Funds

Investors in the data centre market are increasingly faced with the decision of whether to pursue open-ended or closed-end funding strategies. 

Closed-end funds are typically project-specific, with a defined investment horizon and clear return expectations. These funds are well-suited to large, stable projects that generate predictable cash flows, such as hyperscale data centres.

On the other hand, open-ended funds offer greater flexibility, allowing investors to access a broader range of opportunities, including smaller-scale, speculative developments. This flexibility has made open-ended platforms particularly attractive in the current market, as investors seek to capitalise on emerging trends and opportunities in the rapidly evolving sector.

The hybrid approach, combining both operational cash flow and speculative development, appears to be the most successful strategy for many developers. By securing long-term leases with major tenants while also pursuing new developments, they can offer investors a balance of stability and growth potential.

The Power of Location

Energy consumption is an essential consideration for data centre developers, particularly given the scale of power required to run these facilities. Hyperscalers, in particular, are highly sensitive to energy prices due to their massive consumption, making regions with low energy costs particularly attractive.

Spain, for example, has emerged as a key location for data centre development, due to its relatively low energy prices, strong connectivity, and access to renewable energy sources. This makes Spain an appealing destination for developers looking to attract tenants in an increasingly competitive market. 

However, while renewable energy is an attractive option, developers must ensure that they have access to reliable, cost-effective power.

In addition to energy costs, developers are also exploring off-grid solutions, such as small modular reactors (SMRs), which could provide a more sustainable and cost-effective power source in the future. While these technologies are still in the early stages of development, they represent a promising option for meeting the growing energy demands of the data centre sector.

Data Centre Challenges - Power, regulations, and the path to scale

Power Demand and Energy Costs

A central challenge for data centres remains managing the increasing demand for power. As the digital economy continues to grow, so too does the need for data storage and processing capacity. This shift has led to significant energy consumption, which presents both opportunities and challenges for developers and investors in the sector.

Energy costs are a primary concern, with fluctuating prices affecting the profitability of data centres. In the UK, for instance, power infrastructure has become a key focus, with the data centre industry facing challenges in securing grid connections amid increasing competition for power. 

The transition towards renewable energy sources has created additional pressures, as energy generation is often located far from where it is needed most. 

This disconnect between power generation and consumption is a critical issue in regions like the UK, where energy demand in the South East, including from data centres, far outstrips the supply of renewable energy from the North and Scotland.

In response, data centre developers are looking at more creative and sustainable solutions to secure power, such as self-generation, battery storage, and private wire schemes. By investing in these alternatives, they hope to reduce reliance on the grid and mitigate the impact of rising energy prices. 

Regulatory Compliance

The regulatory landscape for data centres is becoming increasingly complex, particularly with the focus     ESG considerations. Data centre developments often face lengthy approval processes due to environmental zoning and building regulations.

In France, for instance, the government has made significant efforts to create a more transparent and structured process for data centre development. However, the speed at which these changes have been implemented has led to confusion and delays, with some investors missing out on fast-track development opportunities. 

The lack of consistency in planning laws and the difficulty in obtaining power connections have created bottlenecks, leading to project delays and higher costs.

As the demand for data centres grows, so too does the need for more efficient permitting processes. Some regions are attempting to address this by streamlining the approval process for data centre developments, but the regulatory landscape remains fragmented across Europe. 

In Spain, for example, the regulatory environment for data centre development is highly dependent on the region, with some areas requiring lengthy approval times and high upfront costs. 

Developers must be acutely aware of these challenges when planning their projects, as regulatory hurdles can significantly impact the time and cost required to bring a data centre online.

Future-Proofing Data Centres

To future-proof their facilities, developers are increasingly focusing on scalable, flexible designs that can accommodate emerging technologies, with some data centres being built with larger power capacities than currently needed, ensuring that they can meet tomorrow’s demands without requiring significant upgrades. 

Similarly, cooling systems are evolving to accommodate new technologies such as liquid cooling, which is essential for powering high-performance computing applications.

However, the rapid pace of technological advancement means that developers must remain agile and ready to make significant investments in upgrading their facilities. The shift towards AI and machine learning, for instance, has led to greater demand for high-performance computing capabilities, which places additional strain on existing data centres. 

To meet this demand, developers must be proactive in upgrading their facilities with the latest technologies, including more efficient cooling systems and power solutions.

Meeting Evolving ESG Standards

As environmental regulations become more stringent and investors demand greater transparency, data centre operators must ensure that their developments align with evolving ESG standards.

In the UK and Europe, data centre developers are increasingly being asked to provide detailed reports on their sustainability efforts, including energy usage, carbon emissions, and waste management. These reports are often used by investors to assess the environmental impact of their investments and ensure that their portfolios align with global sustainability goals.

However, the lack of consistent ESG metrics presents a challenge for the industry. Many data centres are still grappling with how to measure and report their environmental performance accurately. 

The varying standards across different jurisdictions make it difficult for operators to benchmark their performance and compare themselves to industry peers. As a result, the sector must work towards developing more consistent and transparent ESG reporting frameworks to support long-term sustainability and attract investment.

The Role of Data Centres in Local Communities

The impact of data centres on local communities is another important issue that developers must consider. While data centres can bring significant economic benefits, including job creation and infrastructure investment, they are often met with resistance from local communities. 

Public perception of data centres is often negative because communities tend to see them as large, power-hungry, visually intrusive facilities that offer little direct benefit to the local area. They are frequently viewed as consuming scarce grid capacity that could otherwise support housing or local services, while creating very few on-site jobs to justify their scale. 

The lack of understanding about their role in enabling the digital economy further widens this gap, with many people unaware of the downstream employment and societal value they support. 

As a result, residents often question why a high-consumption, low-visibility industry should be located in their area, reinforcing scepticism and resistance during planning and consenting processes.

To address these concerns, developers are increasingly working with local governments to integrate data centres into the surrounding community. This can involve creating jobs, improving local infrastructure, and engaging with the public to raise awareness of the benefits that data centres can bring. 

In some cases, data centre developers are looking at ways to repurpose the heat generated by their facilities, such as using it to power local district heating systems or support agricultural projects.

In France, for instance, some developers are exploring the possibility of creating data centre "campuses" that include educational facilities, community spaces, and technology hubs. By creating these mixed-use developments, data centre operators can help to foster community engagement and demonstrate the broader benefits of their projects.

Strategic Partnerships in Data Centres - Win-win returns or market advantage?

Partner Selection: Ensuring Long-Term Value

The selection of the right partners is crucial to the long-term success of data centre projects. A partnership strategy must align the goals of all parties involved, from developers to investors and utility providers. 

Establishing a common vision for the project, ensuring mutual trust, and leveraging complementary skill sets are vital in creating a sustainable and scalable data centre business.

The ideal partners bring valuable expertise that can complement existing capabilities, whether it’s through experience in permitting, construction, risk management, or operational efficiency. Successful partnerships are built on shared knowledge and trust, ensuring that projects are completed on time, within budget, and to the satisfaction of end users.

Collaborative De-risking

Data centre development involves significant financial risk, from securing land and power to dealing with complex construction and regulatory hurdles. By entering into strategic partnerships, developers can share these risks, reducing individual exposure while maintaining project momentum.

Effective collaboration allows for the distribution of financial risk and operational responsibility, helping to mitigate delays or cost overruns. However, while risk-sharing offers protection, it can also dilute control and returns. Clear and well-structured agreements are essential to ensure that all parties are aligned and that risk is managed in a way that benefits everyone involved.

Unlocking Growth Opportunities

With access to capital remaining one of the most significant enablers of growth in the data centre market, strategic partnerships can allow developers to unlock new funding sources, facilitating the rapid scale-up of projects. 

However, managing decision-making across multiple stakeholders can add complexity to capital deployment. While some partnerships may focus on traditional investment models, others may adopt more flexible capital structures, enabling quicker responses to market demands. 

By bringing together expertise in development and capital management, strategic partnerships help accelerate the pace of data centre delivery, particularly in regions where demand is outpacing supply.

Leveraging Local Expertise

When expanding into new markets, operational control is a critical factor in ensuring the success of data centre projects. Developing facilities in unfamiliar regions requires a deep understanding of local regulatory, energy, and infrastructure dynamics, making partnerships with local players - whether government bodies, utility providers, or experienced developers - a huge benefit to navigating these challenges.

Local expertise plays a significant role in overcoming regulatory hurdles and securing the necessary resources, such as land and power. Additionally, by aligning with regional players, developers can leverage established relationships and networks, speeding up the approval and development processes. The ability to adapt to local conditions while maintaining operational excellence is essential for long-term success.

Exit Strategy Flexibility

An effective exit strategy is crucial in any partnership, ensuring that all stakeholders are able to realise their returns when the time comes. In the data centre sector, exits can take various forms, including asset sales or platform sales that bundle multiple assets and operational capabilities together.

The nature of the data centre market, with its long-term leases and stable cash flows, makes it an attractive proposition for institutional investors. However, as the market matures, the ability to execute flexible exit strategies becomes increasingly important. 

Factors such as technological advancements, changes in tenant demand, and shifting regulatory landscapes all influence the attractiveness of an exit.

The key to a successful exit strategy is ensuring that the partnership structure allows for adaptability and responsiveness to market conditions. Whether selling individual assets or a platform, it is important that the partnership remains flexible enough to capitalise on opportunities as they arise.
 

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Thank you to everyone who participated in the GRI Data Centres Europe 2025 conference.