INREV paper puts data center exit planning on par with entry

Exit planning deserves as much weight as the entry decision for European data centers, according to an INREV paper. The study is based on interviews with investors, fund managers, developers and operators representing more than €1trn in alternatives assets.

Power availability, the timing of grid connections and planning approvals decide what a European data center is worth. Tenant quality and technological change are the main risks, said Iryna Pylypchuk, INREV's director of research and market information, in a commentary published by IPE Real Assets. Interest from European institutions has run ahead of the in-house skill needed to underwrite and manage the buildings. Most real estate investors do not hold that skill set naturally, and many are still assembling it.

For an allocator sizing a first data center position, ticket size is the constraint. Direct assets are large enough that a single purchase can leave a smaller or mid-sized portfolio over-allocated to one site. The paper says some investors are reducing that concentration through open-ended funds. Picking the route is therefore part of the exit decision. The scale of an investment determines which routes to market are open and how many buyers could take the asset off the investor's hands.

"Investors should not assume, however, that sector-wide demand will translate into liquidity for every asset or strategy," Pylypchuk said. Data centers carry exit risks that differ from traditional real estate: the assets are specialized, the capital required is substantial, concentration risk is high and the pool of potential buyers is relatively limited.

The number of potential buyers for an individual asset may fall as the asset grows and its capital requirement rises. Depth varies by market: liquidity is generally stronger in established, high-demand markets where a broader buyer pool gives more room at exit. Investors and hyperscalers will look for more varied ways into the market, and liquidity and diversification are likely to weigh more heavily in strategy selection, according to the paper.

The paper is equally direct that the asset class will not suit every portfolio, and that for some investors the right choice is to hold back for now.