The Rise of Data Centres: Powering the AI Revolution

Data centres have emerged as one of the most significant commercial real estate asset classes in recent years, transforming from specialised technical facilities into critical infrastructure that powers our increasingly digital economy. But what exactly are data centres, and why have they become such a focal point for investors and developers?

What Are Data Centres?

At their core, data centres are purpose-built facilities designed to house computer systems, servers, and networking equipment that store, process, and distribute the vast amounts of digital information that powers our modern world. These highly specialised buildings require robust power supplies, advanced cooling systems, sophisticated security measures, and exceptional connectivity to function effectively.

Far from being simple warehouses for servers, modern data centres represent the convergence of real estate, technology, and infrastructure, creating a unique asset class with distinctive characteristics and investment dynamics.

What's Driving Data Centre Demand?

Several converging factors are fuelling the seemingly insatiable appetite for data centre capacity:

• Digital Transformation: Businesses across all sectors are migrating operations to digital platforms, requiring secure, reliable infrastructure to host their applications and data
• Cloud Computing: The shift from on-premises IT infrastructure to cloud-based services has created massive demand for hyperscale facilities operated by providers like AWS, Microsoft, and Google
• Artificial Intelligence: The explosive growth in AI applications requires unprecedented computing power and data storage capabilities, with AI workloads demanding specialised infrastructure
• Internet of Things (IoT): The proliferation of connected devices generates enormous volumes of data that must be processed, analysed, and stored
• Content Streaming: The surge in video streaming, gaming, and digital content consumption necessitates robust infrastructure to deliver seamless experiences
• Data Sovereignty: Increasing regulatory requirements around data localisation are driving demand for facilities in specific jurisdictions

The UK Data Centre Market: A Powerhouse of Growth?

London is currently the most significant data centre market in EMEA, with operational capacity reaching 1,141MW according to Cushman & Wakefield. The Greater London area is experiencing a surge in major infrastructure developments, with significant data centre campus expansions in Hayes and Slough. A substantial new £750 million hyperscale facility is also in progress in Newham. Beyond London, Latos Data Centres has revealed plans to establish 40 new locations across the UK, including a flagship hyperscale site in Cardiff.

The continued expansion of hyperscale data centres across the UK has emerged as a key component of the government's broader economic growth strategy. In its AI Opportunities Action Plan released in January, the government outlined a £14 billion vision to position the UK as a global leader in digital innovation.

Investment Appeal

The growing importance of data centres as critical infrastructure has attracted significant investment from institutions, private equity and developers, with major players like Blackstone leading the charge. Data centres have captured the attention of these investors for several compelling reasons:

• Stable, Long-Term Income: Data centres typically feature long lease terms with built-in increases, providing predictable cash flows
• Strong Tenant Covenant: Occupiers often include major technology companies and telecommunications providers with excellent credit profiles
• Resilience During Economic Downturns: The essential nature of digital infrastructure has demonstrated relative immunity to economic cycles
• Significant Barriers to Entry: The complex technical requirements, substantial capital investment, and challenges in securing power and connectivity create natural barriers to competition
• Scalability: Potential for investors to create scalable models, particularly within colocation and cloud services. 

The Evolution of AI-Optimised Data Centres

AI has fundamentally transformed data centre design requirements. Traditional data centres typically allocate resources in a balanced manner, but AI-optimised facilities shift dramatically toward compute power. Research shows that while traditional data centres might allocate approximately 55% of expenses to compute, 35% to storage, and 10% to networking, AI-optimised data centres require a much different distribution – closer to 80% compute, 14% storage, and 6% networking.

This shift reflects the intensive computational demands of AI workloads, particularly for training large language models and other sophisticated AI systems. Whilst standard enterprise data centres might operate at 10-20MW, AI-optimised facilities require 2-5x more for equivalent facilities. The UK has experienced a notable shift towards developing larger, high-capacity data centres capable of housing hyperscalers and large enterprise computing resources.

Challenges and Constraints

Despite the robust growth trajectory, the data centre sector faces several significant challenges that constrain development and shape market dynamics:

• Power Availability: The most critical limitation for new developments is access to sufficient electrical power. With 400GW of connection requests in the UK in the queue, Ofgem estimates 60-70% will fail to materialise due to grid constraints.
• Grid Infrastructure: National Grid has announced plans to invest £35 billion in transmission infrastructure to double transferable power by 2029, supporting 35GW of new generation and 26GW of future connection options (albeit only 15% of connection requests)
• Land Availability: Finding suitable sites with adequate power, connectivity, and appropriate planning designations is increasingly difficult, particularly in established markets like London.
• Sustainability Pressures: Data centres are energy-intensive operations, creating challenges in meeting ESG objectives and regulatory requirements around carbon emissions.
• Cost of Energy: As the UK battles globally high energy costs, the viability of specific schemes will present additional barriers to entry

The Future of Data Centres

Data centres have evolved from specialised technical facilities into a mainstream real estate asset class at the intersection of property, technology, and infrastructure. The extraordinary demand driven by digital transformation, cloud computing, and artificial intelligence has created compelling investment opportunities despite significant challenges in power availability and sustainability.

As our digital economy continues to expand, data centres will remain a critical component of modern infrastructure, making them an essential consideration for forward-thinking investors, developers, and occupiers in the commercial real estate landscape.

The future of data centres will be defined by larger, more energy-efficient, and scalable facilities. Strategic focus will shift toward securing power, sustainable operations, and high-performance infrastructure. Operators that adapt to these priorities will lead the next phase of digital infrastructure development.