With the outlook for interest rates murky, it may be best to stay with data centres as an investment theme. Global inhabitants continue to consume and produce vast quantities of digital data. According to DigitalReportal, 5.52 billion people were using the internet at the start of October 2024, equivalent to 67.5% of the world&rsquo s population. Internet users continue to grow too, with the latest data indicating that the world&rsquo s connected population grew by 151 million users in the 12 months to October 2024.

 

Based on the artificial intelligence (AI) megatrend and the rising number of digital natives, data centre occupancy is likely to remain high despite new supply. AI is required to help sift through the ever-increasing amount of data collected in data centres.

 

According to global tech market intelligence provider IDC, organisations are projected to have spent US$235 billion ($321 billion) on AI. This figure is expected to reach over US$630 billion by 2028, representing a CAGR of 30%.

 

Data centres are experiencing critical supply shortages in many markets, according to JLL in its 2025 outlook report. This is despite a high number of completions this year, which are forecast to be above the 2021&ndash 2024 peak in the US, Europe and Asia Pacific. &ldquo Shortages will still exist &mdash such is the growing demand for data centres, boosted by AI requirements, that even this increase in supply will be only a fraction of what the market needs,&rdquo JLL says.

 

Investors need to invest wisely, though. &ldquo Interest rates and financing costs unlikely to return to 2021 lows. Performance will be more determined by asset, market and sector selection and active management to drive income growth,&rdquo JLL cautions.

 

A safe investment for investors looking for recurring income could be Keppel DC REIT, analysts suggest. &ldquo In the upcoming results, we expect Keppel DC REIT to show the strongest interim DPU growth at +9.5%,&rdquo says Goldman Sachs in an update on Jan 17. Keppel DC REIT&rsquo s DPU in 3QFY2024 ended Sept 30, 2024 was 2.5 cents. In contrast, REITs under Goldman Sachs&rsquo coverage is expected to show a 2% decline in DPU on average.

 

&ldquo In the upcoming results, we believe Keppel DC REIT could &lsquo beat&rsquo [consensus estimates] as its recent advanced distribution implies FY2024 DPU of 9.38 cents, 2% ahead of consensus,&rdquo JP Morgan concurs.

 

The US banking behemoth says that along with recent weakness in regional currencies vs SGD/USD investors should focus on S-REITs with Singapore or US assets. Keppel DC REIT&rsquo s exposure to Singapore has increased to 63% (or $3.1 billion) of total assets of $4.9 billion (from 53% as at the end of Sept 30, 2024) following the acquisition of Keppel DC Singapore 7 (KDC SGP 7) and Keppel DC Singapore 8 (KDC SGP 8) in December last year.

 

Both KDC SGP 7 and KDC SGP 8 are immediately DPU-accretive by as much as 11.1%, taking pro forma 1HFY2024 DPU to 5.055 cents.    

Following the Singapore acquisition, on a pro forma basis, Europe comprises 19.8% of assets under management and China&rsquo s share declines to 5.1% from 7% as of end of Sept 30, 2024.  

 

Both KDC SGP 7 and KDC SGP 8 are colocation AI-ready data centres. Additionally, Singapore is the top data centre hub in Asia with extensive undersea cable networks and high-speed internet access. Demand in the Lion City continues to be fuelled by increasing digitalisation, continued cloud adoption and AI.

 

As one of the most power-constrained markets globally, Singapore&rsquo s colocation vacancy rate of around 1% and among the lowest in Asia Pacific. Before the acquisition of KDC SGP 7 and KDC SGP 8, colocation data centres Keppel contributed 67.2% to rental income.

 

Contracted rentals for KDC SGP 7 and KDC SGP 8 on take-or-pay basis are estimated to be at least 15% to 20% below comparable market colocation rents. Colocation rents in Singapore for data centre capacity are expected to trend upwards over the next few years given the tight demand-supply dynamic, according to DC Byte.

 

&ldquo With demand expected to exceed supply in the coming years, utilisation rates are expected to rise from 99.1% in 2024 to 99.4% in 2028,&rdquo says Keppel DC REIT&rsquo s manager, referring to colocation assets, in the REIT&rsquo s circular for its December EGM.  

 

Since Keppel DC REIT is one of the largest owners of stabilised data centre assets in Singapore, it is poised to benefit from further growth in colocation rates &ldquo underpinned by strong demand and limited capacity&rdquo , analysts say.