Artificial intelligence: a generational opportunity in listed real assets
Real estate’s digital transformation
The accelerating adoption of cloud computing, generative AI, and the emergence of quantum computing are fundamentally reshaping the global real estate landscape, with data centres emerging as a core sector. Once considered niche, data centres now form the critical physical real estate and infrastructure that underpins internet connectivity, cloud platforms, and advanced AI applications. However, this surge in demand has revealed significant supply constraints:
1. Power availability: Reliable, high-capacity power is increasingly scarce for new developments.
2. Cooling infrastructure: Water availability for server cooling remains a limiting factor in key markets.
These challenges have restricted new supply growth, driving up rents, occupancy rates, and profit margins for existing assets (see figures 1 & 2).
Figure 1: Primary market vacancy (left)
Figure 2: Average asking rental rate change YoY% for primary US markets (right)
Source: Green Street and datacenterHawk (vacancy) as at September 2024
Chart takeaway
Figure 1: Recent demand for data centre assets has strengthened off the back of AI and other use cases, resulting in a fall in vacancy rates across various regions
Figure 2: Data centre rental rates in primary U.S markets have increased significantly since 2021 driven by the heightened demand stemming from advancements in AI and other emerging technologies.
These dynamics are supporting strong real estate valuations and earnings growth for existing data centre assets, which are proving to be clear beneficiaries of the digital economy’s expansion.
Infrastructure: meeting global energy demand
After decades of stagnant electricity consumption in the US, driven by energy efficiency gains and a decline in domestic manufacturing, the rapid expansion of datacentres and AI adoption has triggered a resurgence in demand.
The US Department of Energy forecasts a doubling of electricity demand by 2050, with much of the near-term growth attributed to the deployment of data centres supporting artificial intelligence applications.
Figure 3: Surging energy demand
Source: US Department of Energy Emerging Markets
Chart takeaway
The substantial projected increase in energy demand driven by AI and other emerging technologies, emphasising the significant power intensity required to support these advanced use cases.
Data centres require consistent, uninterrupted electricity to power servers and cooling systems. This has renewed interest in nuclear energy as a viable solution for meeting these high-load, critical power needs. Nuclear power offers several advantages including; high energy density, minimal greenhouse gas emissions, and consistent output, unaffected by weather.
Opinions on nuclear energy vary. In France, nuclear power plants supply about two-thirds of the electricity needs, while Germany has recently decided to remove nuclear energy from its electricity supply mix due to safety and waste management concerns.
Challenges such as high upfront capital costs, lengthy permitting timelines, and public opposition persist, yet nuclear energy is increasingly viewed as essential to meeting surging demand. Regulated utilities, with their ability to socialise costs, access capital markets, and construct critical supporting infrastructure, are poised to lead this energy transformation.
Key areas of demand include:
The global shift towards electrification, the energy transition, and the growth of AI, data centres and crypto infrastructure are driving an unprecedented demand for natural resources.
Energy: Increased reliance on solar, gas, and nuclear to meet escalating power needs.
Metals and minerals: Essential inputs such as copper, aluminium, and silver, which are critical for building and connecting renewable energy systems in an increasingly electrified world.
However, meeting this demand is constrained by several challenges including geological limitations, NIMBYism (not-in-my-backyard), resource nationalism, de-globalisation, and onshoring trends.
While these challenges can be addressed in the long term, they are likely to sustain supply-demand imbalances in the short to medium term. In our view, this backdrop creates compelling investment opportunities in natural resources, as tight supply conditions support pricing strength and sector profitability.
Investment implications: A new era for Real Assets
As the global economy becomes increasingly digitalised and electrified, hard assets across the real assets spectrum will play a pivotal role in enabling this transition. Data centres, regulated utilities, renewable energy options including nuclear, and natural resources used in the renewable transition, are all well-positioned to take advantage of this economic opportunity.
Global Listed Real Assets can provide valuable diversification and inflation protection through economic cycles. The appropriate allocation mix depends on macroeconomic conditions and investor objectives. In a sticky inflation environment, the inflation-hedging characteristics of commodities and infrastructure are likely to outperform, as these sectors can benefit from inflation pass-through mechanisms quickly. In a falling inflation environment, the cyclical recovery of real estate offers greater upside potential, particularly as valuations rebound from the sharp rate increases in recent years.
By maintaining strategic exposure to real estate, infrastructure, and natural resources, investors can capture opportunities across the real assets spectrum, balancing near-term cyclical gains with long-term structural growth trends.
James Maydew
Head of Global Listed Real Assets
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