Demand for data centers—the physical facilities that house computer servers used by organizations to remotely store, process or distribute data—has ramped up significantly in recent years.
While cloud computing and the growth of social media sparked the initial uptick, data center demand has received an additional, more recent boost due to the inexorable rise of generative AI. New solutions and technologies in this space require a vast amount of storage and rely on data centers to provide it.
The economic potential of AI and analytics is vast, with McKinsey research estimating that these new technologies could create around US$10 trillion of economic value globally. Data centers have a huge role to play in supporting this potential, with the industry growing day by day. By 2026, data centers around the world will already be using an estimated 1,000 TWh annually, according to the International Energy Agency—roughly the same as the electricity consumption of Japan.
EMEA activity ramps up
While the US leads the way in building up data center capabilities, the EMEA market is also gathering pace. According to the IEA, of the 8,000 data centers currently located across the world, one third are located in the US and 16 percent in Europe. Europe’s data center market is going from strength to strength, attracting around £1.8 billion in investment in H1 2024—a 168 percent yearly increase. Despite this sizable sum, an estimated US$250 to US$300 billion of investment is still needed to meet data center infrastructure demand by 2030.
Data center demand across the Middle East and Africa is also on the rise, as growing populations create a greater need for AI-powered and digital services. With US$1.2 billion of active data center projects and a future project pipeline of US$433 million, the United Arab Emirates stands out as a country set for rapid growth.
Africa, meanwhile, is dealing with a significant and widening digital infrastructure gap. While home to 18 percent of the world’s population, it is estimated that the region accounts for less than 1 percent of global data center capacity, leaving a huge gap for investors to fill.
Data and deals
The technology sector across EMEA has followed the overall global M&A trend of higher values from lower volumes. With US$104 billion of deals announced, the first three quarters of this year have already surpassed the US$97.4 billion value total for all of 2023.
The data center subsector has taken a similar trajectory. From Q1 to Q3 2024, there were a total of 113 announced deals valued at US$29.5 billion, compared with 133 deals totaling US$24.8 billion in the same period last year—a 15 percent decline in volume but an 18 percent increase in value.
Despite the rise in value, it could be argued that ongoing headwinds fueled by inflationary concerns and electoral uncertainty in Europe and the US had dampened dealmaking through much of the year. Had it not been for this widespread uncertainty, it is likely even more deals would have changed hands in this fast-growing market.
The UK and Ireland have attracted some of the largest data center deals over the course of the year. The largest transaction saw US investor Starwood Capital purchase an US$850 million stake in Irish data center provider Echelon Data Centres. Echelon owns six sites across Ireland and the UK, with a total potential capacity of up to 500 MW.
The deal, which values the data center provider at €2.5 billion, highlights Starwood’s commitment to expanding its European footprint while taking advantage of the attractive returns Europe’s fast-growing data center market has to offer.
In another significant deal impacting the UK market, US real estate investor Digital Realty acquired a co-location data center in the Slough Trading Estate, just west of London, for US$200 million. The purchase includes two individual data centers with a combined capacity of 15 MW.
A co-location center is a data center facility that rents out rack space to third parties. The Western European co-location market is tipped for rapid growth—from a market value of US$6.9 billion in 2023 to US$10.4 billion by 2029, according to a report from Research and Markets.
Driving trends
Several forces are set to fuel EMEA data center dealmaking over the coming year. Most significantly, strong demand from consumers and businesses for AI, cloud and data services is driving the need to build up data center capabilities.
These facilities are expensive to build and manage, requiring considerable investment to help them grow and achieve scale. This is creating a widening digital infrastructure gap in urgent need of filling.
With a record level of dry powder at their disposal, private equity firms appear ready to step up to the task, having already taken part in some of the largest data center deals of the year so far. Amid a time of political and economic turbulence, data center assets, with their long-term and predictable rate of investment returns, are increasingly seen as a safe haven for investment.
Government initiatives appear firmly on the side of this growing market. The UK’s National Planning Policy Framework, for example, recognizes data centers as a form of infrastructure in their own right, with specific locational requirements needed to support the digital economy. In France, the government’s €1.8 billion cloud R&D funding project looks set to encourage cloud demand, and therefore data center usage, even further.
Challenges on the horizon
As with any rapidly advancing market, the data center industry faces various challenges in attracting the investment it so desperately needs. One significant obstacle is potential power and land shortages, as data centers require a significant amount of power and space to operate. In the UK alone, known data center projects in the pipeline require around 5 percent of the grid’s total capacity. If this capacity is not built, it may need to be powered by traditional fossil fuel sources, which could create tension with regional net zero goals.
While data centers require a large amount of energy to power, many investors and developers are opting for a renewable approach, as this is more cost effective. There is growing pressure across the data center industry to become greener and more sustainable, with governments and companies pushing for change.
The regulatory landscape across European markets is notoriously tough and will continue to cause headaches for dealmakers over the coming year. Complex regulation, particularly surrounding data privacy, ESG concerns and planning laws, will need careful consideration in the deal process.
Outlook
The seemingly unstoppable rise in demand for data-powered services across EMEA will continue to drive investment in the data center market over the near term.
Challenges remain, though, most notably in the form of power and land shortages and a strict regulatory environment. While these are significant hurdles, they are surmountable. Expect dealmaking to accelerate at pace as both sponsors and strategics look to gain a foothold in this thriving sector.
