What are data centres and why are they so important?
What are data centres and why are they so important?
In today’s digital world, data centres are becoming an essential part of life. Data centres are where the cloud lives (cloud computing refers to data centres available to many users over the internet) and where all our data, photographs and music is stored. They are a vital component of the global economy, whether you are an individual, a business, a city or a country.
Just as cities thrived in the earliest days of the industrial revolution when they had ready access to coal and steel, the successful cities of the future will be the ones with the best access to data centres.
So, what are data centres?
Data centres are buildings or groups of buildings used to house computer systems and associated components, such as telecommunications and storage systems. Data centres often include backup components in case of a system failure and various security devices, demonstrating how important IT operations are to modern businesses.
Why are they so important to the success of global cities?
Within the data world, some users cannot tolerate any delay, or latency, to the information that they need. The closer a business is to a data centre, the quicker it will receive the information that it needs. This means that data centres that are close to businesses will have the lowest levels of latency.
With businesses increasingly clustering together in cities, this makes city-centre data centres a vital cog in the economy of a global city.
What do data centres need?
As you might expect, specialist skills are required to build and operate data centres. Just as access to steel and coal was so vital in the early days of the industrial revolution, access to talent is essential to the functioning of the modern global city.
Cities with world class universities, such as London or Boston, benefit from a pool of talent already in the city with employment and business opportunities helping to keep those people in the city once they graduate.
Why are data centres so important in China?
China has more than 800 million internet users and the largest number of online gamers (620 million) in the world. The potential growth for data centres in China is huge, with some analysts predicting that the cloud computing market in China will quadruple by 2022.
In addition, internet data volumes are set to quadruple, driven by an increase in gaming, video and e-payments. Gaming, in particular, is driving growth as activity is online, with players taking part from different locations around the world.
To store your data in China, you have two choices. You can either go to a data centre owned by one of the three state-controlled mobile network operators (China Telecom, China Unicom or China Mobile) or put your servers in a carrier-neutral data centre.
The three state-controlled mobile network operators are relatively inflexible; their services tend to be standardised and users cannot easily connect into other carrier networks. By contrast, carrier-neutral providers offers connectivity to multiple carriers and focus more on service quality.
Why should investors care?
Within China, the strongest demand for data centres is from Tier 1 cities (the biggest and economically most important cities), such as Shanghai, Beijing and Shenzhen. These cities sit in what we call “mega city clusters”, large cities relatively close to each other, creating vast trade areas.
For example, Shanghai sits in the Yangtze River Delta and has a population of 156 million, while Shenzhen sits in the Pearl River Delta, with a population of 120 million.
Although the supply of data centres is abundant in lower tier cities, they generally have lower utilisation rates as bandwidth limitations prevent latency-sensitive clients from using these.
What opportunities does this present?
Demand from investors for real assets in global cities, such as data centres, is set to increase. It remains hard to create a supply of data centres in Tier 1 Chinese cities as land is scarce and there are limitations on power supply quotas and increasing regulatory oversight.
With long-term and increasing demand for these assets, combined with low levels of supply, data centres have the potential to provide investors with the opportunity to achieve sustained growth.
You can find more of our insights into global cities here.
Our global cities index can be found here. It uses a number of factors to identify the most economically vibrant cities across the world. Cities are then ranked in the index to provide a view of where some of the biggest global real estate opportunities lie.
Important Information: The views and opinions contained herein are those of Schroders' Global Cities Team, and may not necessarily represent views expressed or reflected in other Schroders communications, strategies or funds. This material is intended to be for information purposes only and is not intended as promotional material in any respect. The material is not intended as an offer or solicitation for the purchase or sale of any financial instrument. The material is not intended to provide and should not be relied on for accounting, legal or tax advice, or investment recommendations. Reliance should not be placed on the views and information in this document when taking individual investment and/or strategic decisions. Past performance is not a guide to future performance and may not be repeated. The value of investments and the income from them may go down as well as up and investors may not get back the amounts originally invested. All investments involve risks including the risk of possible loss of principal. Information herein is believed to be reliable but Schroders does not warrant its completeness or accuracy. Reliance should not be placed on the views and information in this document when taking individual investment and/or strategic decisions. Some information quoted was obtained from external sources we consider to be reliable. No responsibility can be accepted for errors of fact obtained from third parties, and this data may change with market conditions. This does not exclude any duty or liability that Schroders has to its customers under any regulatory system. The data provider and issuer of the document shall have no liability in connection with the third party data. The Prospectus and/or schroders.com contains additional disclaimers which apply to third party data. Regions/sectors shown for illustrative purposes only and should not be viewed as a recommendation to buy/sell. The opinions in this document include some forecasted views. We believe we are basing our expectations and beliefs on reasonable assumptions within the bounds of what we currently know. However, there is no guarantee than any forecasts or opinions will be realised. These views and opinions may change. To the extent that you are in North America, this content is issued by Schroder Investment Management North America Inc., an indirect wholly owned subsidiary of Schroders plc and SEC registered adviser providing asset management products and services to clients in the US and Canada. For all other users, this content is issued by Schroder Investment Management Limited, 1 London Wall Place, London, EC2Y 5AU. Registered No. 1893220 England. Authorised and regulated by the Financial Conduct Authority.