Microsoft, Macquarie pump billions into power hungry data centres

Global heavyweights Microsoft and Macquarie technology group are joining with Goodman Group to plough billions of dollars into new data centre developments.

Microsoft is committing $5 billion to expand its infrastructure footprint in what the company called its single largest Australian investment in its 40-year history in the country.

An artist’s impression of the 190-megawatt data centre Microsoft is building in western Sydney’s Kemps Creek.

Under the plan, it will increase its local data centre footprint by nine sites to 29 across Canberra, Melbourne and Sydney, accounting for 37 per cent of the company’s $13.5 billion data centre investment worldwide.

The investment will boost its computing capacity by 250 per cent over the next two years. This will enable the company to meet the growing demand for cloud computing services, which are expected to almost double from $12.2 billion in 2022 to $22.4 billion in 2026, according to a white paper by International Data Corporation, commissioned by Microsoft.

Data demand will create a blitz of activity in commercial real estate as investors and developers clamour for a foothold in the booming sector. The growth is shifting focus from traditional warehouses, with land now being snapped up for AI properties. Citi global analysts say it’s “one of the compelling emerging themes globally across real estate”.

“We predict development and construction of hyper-scale data centre capacity will grow meaningfully over the next seven years,” the broking analysts said.

Goodman has plans to build a 126-megawatt campus with two three-story data centres on the former Castrol headquarters in Sydney.

CBRE’s latest Global Data Centre Investor Survey found that 97 per cent of survey respondents will increase their investment in data centres in 2024. All up, 44 per cent said they will allocate more than US$500 million ($A750 million) for data centre investment, a significant increase from the 32 per cent last year.

Tokyo, Singapore, Seoul and Sydney are driving investor demand in Asia Pacific.

Darcy Frawley, CBRE’s Pacific director for data centre capital markets, said data centre consumption from cloud operators and AI firms had driven the growth. “Occupiers are now competing aggressively to increase their data centre footprint to accommodate future business needs,” he said.

“Australia specifically is set to see a large gap between capacity and demand in the medium term, which will lead to significant rental growth and make the sector even more appealing for data centre investors.”

Occupiers are now competing aggressively to increase their data centre footprint to accommodate future business needs

CBRE director Darcey Frawley

Data centres have proven to be an attractive investment opportunity for larger institutional and offshore investment groups, with the average investment size over the last ten years sitting at $94.5 million, unlike many other alternative asset classes.

Macquarie Data Centres, part of the ASX-listed Macquarie Technology Group, has started construction on its $350 million IC3 Super West data centre with construction company FDC as the main building contractor.

IC3 Super West is being purpose-built for high-density cloud and AI workloads, including hybrid air and liquid cooling options.

Render of the Macquarie Data Centre’s IC3 Super West project in Macquarie Park, Sydney.

David Hirst, group executive of Macquarie Data Centres, said it is the third and largest addition to the provider’s flagship Macquarie Park Data Centre Campus in Sydney’s North Zone, and will bring the total campus IT load up to 63 megawatts.

“Sovereign AI and cloud data centres are the backbone of Australia’s AI-driven future. Like all of Macquarie Data Centres’ facilities, IC3 Super West will be Certified Strategic by the Australian Federal Government,” Hirst said.

“This gives our data centres a strong compliance posture as regulations around data sovereignty and AI continue to tighten in Australia and worldwide.”

In the past 10 years, transactions of the assets have been limited, reaching a peak of $3 billion in 2020, with an average investment of about $1.2 billion per year. During the first five months of 2024, a range of offerings has been transacted, amounting to $414.5 million.

Historically, the majority of investment has been concentrated in NSW, primarily in metropolitan areas, followed by Melbourne.

Ray White head of research Vanessa Rader said before the pandemic, yields for data centre assets ranged from 7 to 9.5 per cent. However, during the period of low interest rates, yields compressed to as low as 4.3 per cent.

Recent sales have seen yields rumoured to be as low as 3.6 per cent and as high as the upper 6 per cent range, varying based on factors such as size, location and functionality.

“As Australia’s population grows and its dependence on technology increases, the country’s demand for data is expected to rise,” Rader said.

“While foreign investors have been active in this asset class for some time, Australia is emerging as one of the key global locations for new facilities, following countries like the United States, Germany, United Kingdom and China.”

The growing demand from the listed sector is expected to put pressure on yields and drive the development of new supply.

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