In the eleventh episode of The REIT Report on Classic Business (Fine Music Radio), Garreth Elston, Managing Director of Golden Section Capital and author of the new report Data Centres: The Asset Class Powering the Digital Economy, joins hosts Michael Avery and Alistair Anderson of Property Flash to go inside the buildings that contain the cloud and make a deliberately contrarian argument: The digital economy’s hottest asset class may not be property at all.

Data centres are being marketed as one of the great property opportunities of the digital age. Artificial intelligence may live in the cloud, but the cloud lives in expensive buildings that consume vast amounts of electricity and water, require industrial-scale cooling and can become commercially obsolete. Elston, a property investment professional with 20 years of South African and international investment experience, takes a view that runs against the grain of that marketing. Calling data centres property, he argues, may be the first analytical mistake. His thesis is that a data centre legally involves land and leases but economically behaves like infrastructure. Tenants are billed on power consumption measured in megawatts rather than in square metres, while lease terms typically run up to 20 years, producing what he describes as infrastructure-style cash flows removed from an office or retail building.

Conventional property metrics such as capitalisation rates perhaps do not translate. In Elston’s view, what matters instead is how each lease is structured, who occupies the space and who carries the power risk, which he says can be severe for a landlord if electricity costs spike. Servers and chips become redundant rapidly on his reading of the market, while buildings developed to the exacting specifications of hyperscalers such as Google, Microsoft and Amazon Web Services can be almost impossible to re-let if the tenant leaves. Whether these should be treated as property risks or infrastructure risks is open for debate and not everyone in the industry will frame them as starkly as he does, but his case is that standard property analysis may not capture them.

The market itself spans a wide range, from hyperscale campuses that occupy entire buildings to colocation facilities that work much like subletting and edge facilities small enough to fit inside a shipping container. On the local market, Elston again breaks from the consensus, believing most estimates undershoot. Golden Section Capital’s research counts about 79 operational data centres in South Africa with just under 500 megawatts of capacity, well ahead of commonly cited figures of just over 50 facilities and roughly 350 megawatts, although he concedes that limited disclosure from the global cloud operators and the banks makes any count an estimate. A further pipeline of around 272 megawatts is viewed by the firm as high potential, while Elston is openly sceptical of some far larger announced projects from parties that have never developed a data centre, which in his view are unlikely to materialise. On his numbers, South Africa holds more than double the capacity of the rest of the continent combined, which would make it the clear leader in Africa.

To date the listed sector’s involvement has been cautious. Fortress has sold land within its developments, Growthpoint provided land and building for NTT’s data centre before exiting completely and Redefine counts Amazon and Google as tenants in what Elston believes are straightforward land rentals. The closest thing to a genuine investment, as he reads it, is Attacq, which provides Vantage Data Centers with a dark shell at Waterfall City, supplying the land and building while Vantage fits out everything else including the power. The arrangement captures a small part of the value chain but carries very low risk, an approach Elston regards as sensible given his estimation that the capital intensity of full data centre development is probably prohibitive for listed South African companies at present. That caution is his own position rather than an industry verdict and others in the sector may well see the opportunity differently.

The operating economics, as Elston describes them, reinforce his infrastructure comparison. Servers run close to 24 hours a day at a constant load, which he says makes green power difficult, since even large solar farms and battery installations cannot carry a data centre on their own and operators remain reliant on wheeling arrangements and conventional grid supply. Perhaps his most counterintuitive contention is that power and backup sit relatively low on the cost continuum, with the real expense lying in the servers and especially the chips powering artificial intelligence, whose prices have risen sharply over the past year.

On whether South Africa could eventually list a data centre REIT, Elston notes that many listed data centre companies internationally have been taken private by private equity because of the capital demands, although Singapore shows the model can work on a listed basis. A purely South African listing would in his view be very difficult given the costs and the size of the local market, leaving offshore options as the realistic route to exposure for now. Demand, he suggests, is not the constraint, with hyperscalers increasingly partnering with sovereign wealth funds to fund the enormous capital requirements. The risk he flags is getting the wrong demand at the wrong time and being left with a very expensive building drawing power that is going nowhere, with community resistance to large facilities near residential areas also growing. Whether data centres come to be analysed as property, infrastructure or something in between remains an open question. Elston’s reading is contrarian rather than consensus, but the episode suggests the South African market is beginning to have this conversation.

The REIT Report is a twelve-part podcast series produced in partnership with the SA REIT Association and Property Flash.

Listen to Episode 11:  https://iono.fm/e/1701821