Matthew Norris, investment adviser to the VT Gravis Digital Infrastructure Income Fund, tells Professional Paraplanner why digital infrastructure is the jewel in the crown of the property sector.
Why is digital infrastructure an exciting part of the property sector today?
It all comes down to the sheer amount of data we use today. Just think of this: in the next 60 seconds, there will be 2.4 million Google searches, 213 million emails sent, 16 million texts received, and 694,000 hours of YouTube videos streamed around the world**.
The so-called ‘Fourth Industrial Revolution,’ in which digital technologies have changed the way we work, live and play, is well underway. And this evolution has happened startlingly quickly. To put it into perspective, it took Uber 70 months to get 100 million active users. By the time TikTok arrived it took just 9 months to achieve the same number, and ChatGPT just 2 months***.
As the technology available to us grows, so too does the demand for the data which powers and enables it. More data requires more bandwidth, and more bandwidth requires more digital infrastructure. To me it’s a no brainer that this part of the property sector is going to continue to grow exponentially in the next few years.
Tell us about the four sub-sectors you see benefitting most from this growth
There are four sub-sectors of digital infrastructure that I believe are particularly interesting today: data centres, communication towers, networks and logistics.
Data centres are perhaps the most exciting. They are the physical facilities that house computer systems and their related hardware equipment that’s needed to store, process and disseminate the data we all use on a daily basis. Every tap of our keyboards and screens leaves a digital footprint and the more activity we engage in, the greater the requirement for server storage. Even with the compression of memory capacity into ever smaller chips, data centres are growing in scale and number worldwide and, with generative artificial intelligence booming, demand is only going to increase.
Another attraction of data centres is the contractual leases that are in place. The real estate company and Real Estate Investment Trust (REIT) owners and developers of these vast, specialist, data centres lease space to tenants, with many leases including contractual rent escalators, lending a degree of dependability and predictability to the future income streams, as well as inflation protection. Additionally, these assets benefit from high tenant retention rates.
Then there’s communication towers, which are the key piece of infrastructure that sits between data centres and the consumer so that we can use our mobile phones and computers and play our online games. Fast and seamless connectivity is all that matters to users, so a network of towers with excess capacity is required to ensure interruptions are kept to a minimum.
The owners’ business models are very straightforward. They simply erect a steel tower, bolt it to a concrete plinth, and rent space on the tower to network and communications companies. Each tower has the capacity to host multiple tenants, and these assets enjoy long rental contracts of five to ten years, high tenant retention rates, and many leases contain contractual inflation-linked escalators. That’s why towers have been described as “the best business ever”.
The third area I like is logistics assets, which fall into two categories: e-commerce fulfilment centres, such as the Amazon big box warehouses; and urban logistics spaces that enable same day and next day delivery. No longer are logistics spaces used simply for storage – they are part of a complex supply chain solution, marked by increasing rates of automation. These vast logistics spaces are well located near major motorway junctions and customers, and often fitted with sophisticated fulfilment technology. Additionally, there is growing demand for smaller logistics warehouses, located within or near towns and cities, that enable e-tailers to be nimbler and provide products quickly to nearby homes.
Tenants of logistics assets tend to be relatively ‘sticky’, with occupier turnover low. This is because the meaningful amount of money involved in a tenant moving from one location to another makes staying in place a far more appealing option for businesses. Industry experts estimate the cost of relocation at £4 million the per 100 sq. ft of warehouse space****, not to mention the operational disruption.
The final area I like is networks – the fibre optic cables joining everything together to enable digital communications. They deliver ultra-high speed internet access and data centre colocation space and are vital for the future of telecommunications and internet connectivity because they can support the increasing demands of digital technologies and, through internet service providers, offer reliable and fast internet services.
Unlike traditional broadband connections that rely on copper cables to transmit data, fibre optic technology converts data into light signals. The speed of light results in incredibly fast data transmission rates, higher bandwidth, and longer distance transmission – all without signal loss because they are not sensitive to weather conditions. Importantly, fibre optic technology is also more energy-efficient compared to copper-based technologies, which means the cables have lower energy consumption and a reduced carbon footprint.
*Source: FE fundinfo, total returns in GBP, 31 May 2021 to 31 May 2024
**Source: wyzowl.com, internetlivestats.com, mackeeper.com, sellcell.com
***Source: time.com
****Source: Gravis, June 2021
The VT Gravis Digital Infrastructure Income Fund marked its third anniversary on 31 May 2024. Designed to give investors exposure to companies which own the physical infrastructure assets that are vital to the digital economy, it has returned 0.35% since launch, making it the 7th best performing fund in the 50+-strong IA Property Other sector*.
Important Information
This article has been prepared by Gravis Advisory Limited (Gravis) and is for information purposes only. This article should not be considered as a recommendation, invitation or inducement that any investor should subscribe for, dispose of or purchase any securities or enter into any other transaction with the VT Gravis Funds ICVC, or any other Fund affiliated with Gravis. Past performance is no guarantee of future performance.
