Event Voice: How AI is driving the growth in digital infrastructure

Datacentres are moving from price takers to price makers

Partner Content - Gravis Advisory Limited sponsor of the Channel Islands Event. Matthew Norris, Director and Real Estate Securities, looks at the VT Gravis Digital Infrastructure Income Fund.

Overview of the strategy in terms of what we are trying to achieve, investment process and the make-up of the investment team:

In the minute or so it takes you to read this Q&A, there will have been 2.4 million Google searches, 16 million texts received, and 694,000 hours of YouTube videos streamed*. The so-called ‘Fourth Industrial Revolution,' in which digital technologies have changed the way we work, live and play, is well underway. 

As the technology available to us grows, so too does the demand for the data which powers and enables it. More data requires more bandwidth, and more bandwidth requires more digital infrastructure. In fact, the digital infrastructure needed to support and enable the storage and transmission of reams of data across the world every day is now as critical as our transport networks. 

Designed to invest in the companies which own the physical assets vital to this new and evolving digital economy, the VT Gravis Digital Infrastructure Income Fund invests in best-in-class, next generation real estate and infrastructure companies that are listed in developed markets. It focuses on four sub-sectors of digital infrastructure: Data Centres, Communication Towers, Networks and Logistics. 

The Fund has returned 6.80% since its launch in May 2021, compared with a 1.19% return from its average peer in the IA Property Other sector**.

Earlier this year, Robeco and Gravis collaborated to launch a Luxembourg based UCITS version of the strategy. Managed by the Gravis team and distributed globally by Robeco, the new fund is a sub-fund of the Robeco Capital Growth Funds SICAV and Article-8 classified under the Sustainable Finance Disclosure Regulation (SFDR).

How are you currently positioning your portfolio?:

The Fund currently invests in 32 listed infrastructure companies across the four sub-sectors. Logistics assets, make up 50.9%*** of the portfolio today. To meet customer demand for next-day and same-day delivery, e-commerce retailers have focused their efforts on developing high-tech and well-located fulfilment solutions. However, instead of owning property, the e-commerce businesses are often the tenant, leasing space from a Real Estate Investment Trust (REIT) landlord.

A further 24.7%*** of the portfolio is comprised of data centres. Every tap of our keyboards and screens leaves a digital footprint and the more activity we engage in, the greater the requirement for server storage. With generative artificial intelligence booming, demand is only going to increase.

20.1%*** of the portfolio is invested in communication towers - the key piece of infrastructure that sits between data centres and the consumer. Fast and seamless connectivity is all that matters to the user, so a network of towers with excess capacity is required to ensure interruptions are kept to a minimum

The remaining 3.7%*** of the portfolio is invested in networks – the fibre optic cables that deliver ultra-high speed internet access and data centre colocation space. They are vital for the future of telecommunications and internet connectivity.

Identify a couple of key investment opportunities playing at the moment:

One of the most exciting areas of digital infrastructure is data centres. The AI boom has been a bit of a double-edged sword for the sub-sector. It obviously means that demand for data storage is increasing, but the success of the magnificent seven has made them so powerful that while they have been hungry for more and more space, they've been able to dictate the price they pay for it. 

That dynamic has recently started to shift – demand is at such a level now that space is extremely hard to come by and data centre landlords are moving from being price takers to price makers, which means rental growth is starting to come through. Some logistics assets are seeing this demand/supply opportunity and are looking at databanks as an alternative use of their landbanks. 

The other factor that is opening up opportunities is the wider economic environment. The interest rate easing cycle has begun around the globe, credit spreads have shrunk, valuation yields have plateaued, and rents are growing. I think  we are at a pivotal moment, with all the ingredients in place for a significant re-rating and a strong foundation for future growth. 

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Matthew Norris Director and Real Estate Securities at Gravis Advisory Limited.

* Source: wyzowl.com, internetlivestats.com, mackeeper.com

** Source: FE fundinfo, total return in GBP, 31 May 2021 to 16 October 2024.

*** As of 30 September 2024

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