June 16, 2013 2:09 pm

Outsourced data centres face a tough sell

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An employee stands between rows of data storage equipment in the server hall at Facebook Inc.'s new storage center near the Arctic Circle in Lulea, Sweden©Bloomberg

Facebook located a data centre near the Arctic Circle in Lulea, Sweden, to help cut the cost of cooling equipment

For Wayne Rooney and co., it is squeaky bum time.

The Manchester United footballer is among those who invested a total of £263m in a venture to convert a former Tyneside industrial site into one of the UK’s largest outsourced data centres.

But unlike a Premiership stadium, the facility is far from guaranteed a full house.

Since opening earlier this year, the Cobalt Data Centre Campus has yet to sign up any customers and must now persuade companies to relocate their data storage away from London.

That is unlikely to be an easy task. Another regional flagship – Next Generation Data in south Wales – has leased only one-ninth of its space since opening in 2009.

With space equivalent to about 17 football pitches, Next Generation Data could become one of the world’s largest outsourced data centres.

Yet at its current rate of sales, it expects to take another two or three years to fill the first of its three floors.

“There’s no shortage of supply or potential supply,” said Tim Anker, director of the Colocation Exchange, a broker of space in data centres.

Once viewed as akin to office space, data centres are often referred to as a separate asset class with leases calculated by how much power users consume.

Private equity firms, property developers and specialist service providers have all built stakes in the sector amid increasing interest in big data and cloud computing.

Last July, Digital Realty Trust, a US investment vehicle, paid £716m for three facilities in London.

“Everyone said that the new entrants wouldn’t be able to get financing – but they obviously did, because they’re still here,” said Mr Anker. “That’s in contrast to where we were in 2007 when there really was an imbalance between supply and demand.”

Nonetheless, both Cobalt and Next Generation Data – which were conceived as regional development projects – are rare beasts.

Unlike most UK facilities, they are not owned by the companies that use them. And unlike most of the country’s outsourced data centres, they are located far from central London, where connectivity is fastest.

Data takes approximately 1.6 milliseconds to travel from London’s docklands to south Wales – which makes the Next Generation site unsuitable for financial traders.

“Demand drops off massively outside the M25” said Andrew Jay, a data centre analyst at property consultancy CB Richard Ellis.

Cobalt’s sales pitch is based on the northeast’s colder climate, which reduces the cost of cooling IT equipment.

Climate was one of the reasons that Facebook located its newest data centre in northern Sweden where average temperatures are below 0°C for five months each year.

While typical data centres have a power usage effectiveness (PUE) ratio of more than 2 – meaning they use more than twice as much energy as needed to power the IT equipment – Facebook’s Arctic facility has a PUE of 1.07 and Cobalt’s is about 1.2.

Cobalt is promising users savings of up to one-fifth compared with storage in London. Next Generation Data claims even larger reductions, based on lower land prices.

Yet both flagship data centres must also counter a shift in the market.

They are wholesale facilities – aiming to sell several thousand square metres of space on long-term leases.

“The wholesale market is pretty dead and the reason is nobody wants to take on huge balance sheet liabilities,” said Mark Chester, partner at law firm Wragge & Co.

There is more activity in co-location facilities, where companies can rent smaller quantities of space alongside other users, he added.

There, too, most capacity is based around London, although regional supply has been growing.

Another factor limiting demand for space in data centres is improved technology. Through “virtualisation”, a single server can store as much as seven times more data as in the past.

“We are seeing two competing trends: one is that the data in the world is doubling every 18 months, the other is that people have been virtualising their infrastructure,” said Nick Razey, chief executive of Next Generation.

If demand continues to be lacklustre, wholesale providers can limit their exposure by delaying investment in fittings and equipment.

“We’re not going to have a big boom and bust in data centres,” said Mr Jay.

Yet the current travails of regional data centres could form part of a learning curve.

“A lot of speculators have come in and they don’t realise the complexities,” said Nicola Hayes, managing director at DCD Intelligence, a research group.

“The businesses that have worked really well have tended to be those with an IT background. We’re going to see a few people getting out of the sector.”

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