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Keppel DC REIT: Why Costs Matter for Data Centres

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.

Cost matters

Last week, we took a look at what a data centre looks like. Here’s the diagram again, for reference.

Source: Keppel DC REIT IPO prospectus

One of the key differences between a data centre and a regular commercial building is the high technical content that goes into it.  

For more details, we can refer to a market research report prepared by BroadMedia Consulting (BMC), a group that was commissioned by the REIT’s manager for research on its industry. According to BMC, data centres are designed to meet high technical standards, and all these additional systems and equipment are not cheap:

“Upfront capital expenditure for the equipment and fit-out range from approximately US$1,200 to US$2,000 per sq ft of net technical space. This excludes the cost of land and basic shell of the building.”

These equipment also occupy a significant amount of space within the data centres. BMC explains:

“In a data centre, space is required for power generators, cooling equipment, loading bay, staging room and operations bay, and hence the net available space for users to place their networking and computer servers is known as the net technical space which ranges between 40% and 80% of the gross floor area.”

BMC also provided a breakdown on the costs required to setup a data centre. That is summarised in the diagram below:

Source: Keppel DC REIT IPO prospectus

From the above, we can observe that the electrical and mechanical installations are, by far, the highest cost components of a typical data centre. Interestingly, the installations are tied to the power and cooling requirements of data centres. BMC notes:

“The largest proportion of the cost, being approximately 50% to 75%, is attributable to the electrical and mechanical installations, which are related to the provision of power and cooling.

Such equipment will typically last 10-15 years or more, although some equipment, such as the cooling tower, may last 25-30 years.”

It is important to understand the cost structure of data centres, as different types of data centres will have very different costs. That will be something that we will explore next.

Hang on for more on Keppel DC REIT in the coming days.  

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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.