Trebbi Polska has recently been appointed to support a major player in the data-centre market, who is keen to build on their world-wide programme with major real estate developments in Poland. During the initial briefing, I was reminded of the first data centre that Rose (the sister company to Trebbi ) completed on behalf of what were then ‘computer companies’ such as Oracle, Hewlett Packard, Sun Microsystems and DEC (some have now disappeared and been consumed during the consolidation of the market driven in a large part by the move to dumb terminals and mobile computing).
Our commercial data centre operators like Global Switch were early into the market and effectively presented an outsourcing opportunity for the big computer companies, whose boards were coming under pressure to deliver shareholder returns and get back to basics. I remember when we were acting for Oracle when it purchased Sun Microsystems, primarily to absorb its data centre capability and network. We visited most key sites in Europe and it was clear that the building itself was just the shell – albeit a tall one; it is the power and load capacity to run some major cooling plant that is key. To reinforce this point, our last visit was to an ex nuclear shelter, now a strategic data centre outside Stockholm – with a staff of one and mountains of server racks full of equipment.
So what has changed from those early days and why Poland?
When we started looking at data centres, the need was for highly serviced locations (industrial property was good), the ability to deliver largely unattractive buildings that were not renowned for their architectural merit, good access (again heavy industrial parks were attractive) and not in prime locations so rent/site purchase costs were not excessive – recognise anything?! They were called internet hotels and the rack spacing and height was determined by the size of the servers. You could rent a rack or 50 racks. Technology has moved on significantly and the servers that store and hold our data today are small but extremely powerful, it means smaller units but more of them, with higher heat load and power requirements.
Data centre development is now a real-estate play, purpose-built buildings with rack space let to users on medium-term leases all with very strong covenants (such as Microsoft). The completed investment being valuable as a real estate investment. Hence venture capital groups are now in the market, funding the specialist developers/operators, knowing that their business plan to get in, hold and get out within a five-to-ten-year cycle is perfectly achievable with a good return on capital employed.
Poland in turn is now a stable and mature market for real estate, so the real estate asset is liquid and there is a strong supply and demand characteristic. We have a significant number of redundant heavy engineering facilities that no longer fulfil the requirement for modern manufacturing and are redundant. We have a talented workforce who embrace technology and innovation and we have an ever-improving transport system of road and rail. To my mind this is not a one-trick pony, this is the start of a trend to re purpose existing sites and stock to enhance the real-estate offer to new investors who, supported by local partners like Trebbi Polska, can maximise the opportunities that present themselves and be successful.
Together with my colleague Adam Toploski, I have visited the latest site to get our clients’ attention, for confidentiality reasons I cannot discuss location, but the key fundamentals are in place and yet we should not be complacent, as there remain some pitfalls which should not be overlooked.
Sufficient power is key and with two alternative sources to give resilience, these buildings effectively never ‘go down’. We need ensure that if new power sources are required, we can exercise rights over third party land to allow for extensions. All major centres require standby generation, diesel or multi fuel . The green agenda is extremely important to International investors and Poland does need to recognise this and accelerate adoption where possible of the Climate change agenda.
High-capacity fast fibre links are essential, at least three separate supplies with access to the internet exchange points for high traffic. A good gas supply is required for heating or as an alternative for the standby generation as well as good-quality water supply for cooling purposes. It is always essential to check planning restrictions, it is easy to assume that major industrial sites have limited planning restrictions, but this not always the case, height restrictions may be an issue when introducing stacks for any of the standby generation, use-class for the property, or in our case, the site itself.
The majority of companies specialising in data centres are financially backed by institutions, so the completed development must eliminate or at worst mitigate the normal ‘nasties’. All deleterious materials must be removed, bearing in mind the majority of sites under consideration are ex industrial, extensive site contamination surveys must be completed and any contaminants including heavy metals are to be removed, the case for capping was lost a few years back as it again restricts the site for alternative uses. The fact that the building operation is 24/7 can impact on the current planning consent, and a dialogue with key stakeholders is essential.
This is a worldwide business and our clients are developing worldwide, they remain attracted to Poland for some of the real-estate reasons above, but we should not under estimate the impact that the business climate has on decision making. Poland as a nation is very much open for business. The government needs to maintain that ethos, and business from around the world will see the merits of the location and the professionalism of the people, and will continue investing. We are already in dialogue with data centre clients who are looking towards Germany and Scandinavia, but the attraction of Poland remains strong and it is imperative that the government continue to embrace international trade as the potential is huge for these evolving markets.
So – in summary; the fundamental criteria that leads to a successful data centre development has not changed significantly. The patronage shown to the UK in the past has moved on for economic and value-driven reasons. Poland can embrace the sector, it has great fundamentals, strong capability to deliver and a significant redundant industrial stock across many sites to maximise the opportunity that is presented. Stability and confidence in the economics and politics remain key and so far, so good although the spectre of inflation is looming, we must be mindful that construction costs cannot be unleashed and spiral out of control as this will curtail development activity generally. However, having conducted our cost analysis and dashboards for Data Centre developments, there is some headroom in construction cost sensitivity as a percentage of the overall development deal. The market will deal out cost increases as we exit the pandemic and the world starts producing at pre-2019 levels. Our role as professional advisors is to anticipate and predict where possible and plan ahead, so that the impact of any cost increase is minimised.
Opportunities still present themselves in Poland, and the clients have the appetite for the right location and position – Is Poland going to rise to the challenge and satisfy the demand, or is it going to miss the train?