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Keppel DC REIT: Why Are Data Centres Needed Anyway?  

Keppel DC REIT (SGX: AJBU) was listed back in December 2014.

At its initial public offering (IPO), units of Keppel DC REIT were offered at S$0.93 apiece. The REIT closed trading at a unit price of S$1.43 on 11 December 2017, providing its early investors a total return of over 75% since its IPO (including dividends). As Foolish investors, we want to look beyond the stock price movement to understand the underlying business.

And for that, we can turn to Keppel DC REIT’s IPO prospectus. The document contains a wealth of information on the REIT’s business and market.

What’s a data centre, anyway?

First, we took a look at what a data centre looks like. In short, the previous article is about “what”. Today, we are going to look at the “why”.

More specifically, why are data centres needed in the first place? For that, we can delve deeper into a market research report prepared by BroadMedia Consulting (BMC), a group that was commissioned by the REIT’s manager for research on its industry.

Data centres were not always an important consideration for companies. There’s a good reason for it. According to BMC:

“Data centres used to be a low ranking priority for many corporations.

This was due to limited data usage, less emphasis on security of data storage and reliability of mission critical systems, as well as lower penetration of IT and cloud based systems.”

In fact, BMC estimated that over 80% of data centres are still owned, and operated by companies themselves. Bear in mind: the IPO report was filed in December 2014. Over the last decade, outsourcing to third party data centres became more popular, BMC notes:

“Over the last decade from 2003 to 2013, however, third party data centre demand has grown by 14.7% CAGR, and outsourcing data centres to a third party is now an increasing trend as the requirements of data centres become more complex and requires higher operational and management skills.”    

The demand did not rise in a linear fashion. In BMC’s view, the appetite for third-party data centres increased in waves:

Source: Keppel DC REIT IPO prospectus  

The first and second wave occurred in large cities where internet exchanges were located. During the third wave, the market shifted towards industry specific needs, and become more fragmented as different offerings were provided for different markets.

The fourth wave, which by BMC’s estimates, began in 2013, saw corporations recognise data centres as important part of their IT infrastructure. As BMC says:

“They are no longer considered assets that are run and managed separately from an organisation’s broad IT and business strategy. Data centres are, thus, seen as critical to the IT and cloud aspirations of corporate users.”

The research outfit believes that data centres will continue to grow in the coming years. Hang on for more on Keppel DC REIT next week.  

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The information provided is for general information purposes only and is not intended to be personalised investment or financial advice. Motley Fool Singapore writer Chin Hui Leong doesn’t own shares in any companies mentioned.