Given the growth of the data and cloud computing industry, wealth managers should keep a close eye on data center REITs. They have potential to appeal to not so risk-averse investors seeking alternative and innovative products.
Real estate investment trusts (REITs) are taking over the property investment market in the US and beyond, with HNW individuals globally increasing their allocations in these products. REITs provide a high diversification of real estate investment solutions, making it a fairly stable asset class, which appeals to risk-averse investors. This is all to the benefit of wealth managers, as REITs – contrary to direct property investments – contribute to fee revenue.
However, there are naturally some drawbacks of investing in REITs. Both residential and commercial property prices remain exposed to economic turnarounds. It is enough to mention the turbulence in the UK property funds market following the EU referendum in 2016. Given that HNW investors in general are looking for new and alternative investment products, it comes as no surprise that REITs with innovative strategies are attracting increasing attention.
Data center REITs are one example. Cloud computing is a buzz word, but data is not floating around in clouds. It is stored in a more tangible fashion, and as technology is taking the upper hand on information management, an increasing number of properties are dedicated to storing data.
That is where data center REITs come into play. In fact, they have existed in the market for years. Holding its initial public offering in 2004, Digital Realty Trust, the largest data center REIT in the world in terms of market capitalization, currently owns approximately 130 data centers, and has scored a CAGR of above 17% from 2015 to the beginning of 2017. In general, data center REITs (most of which are US-based) continue to outperform the broader REITs sector: in December 2016 they registered growth rates of 5–12%. This niche market is expected to expand even more given the positive growth forecasts for big data and cloud computing.
As with each asset class and investment product there are risks though, which wealth managers should communicate to clients interested in data center REITs. Despite historically providing higher returns than traditional REITs, data center REITs prove to be more volatile and are not immune to the influence of external factors. The PRISM scandal in 2013, the issuance of data sovereignty laws in France in 2015, and the political turmoil of the second half of 2016 all show that even the market leaders are able to register considerable losses.
Nevertheless, data center REITs remain a good alternative for investors who are willing to take a higher risk in exchange for higher return prospects. They can successfully answer the growing demand for products from outside the standard pool of stock and bond options.
For further information please contact Silvana.Amparbeng@globaldata.com.