Down on the French Riviera earlier this month, institutional investors were lining up to tell anyone who cared to listen that they wanted to make their first forays into the UK and European data centre market in 2025. Behind the existential vibes about Cold War 2.0 and the continentwide living crisis that gripped MIPIM, data centres were having a moment.
An asset class once the domain of the globe’s biggest private equity businesses and infrastructure investors is now set to be fuelled by more traditional real estate and institutional players. But there is a “but,” and it’s a big one.
While 2025 should shape up to be the year of the data centre in Europe and the UK, plenty of barriers to expansion exist, from available land near major conurbations to identifying sustainable ways of feeding the notoriously energy-hungry facilities. Because while capital powerhouses might be in the frame, there is no escaping the fact that data centres are houses of power.
And urgent questions are emerging about how the UK, in particular, can modernise and expand its grid system to keep pace with demand and ensure it rivals other European markets.
In South Mimms, DC01UK promises to be the biggest data centre yet.
“Traditional real estate money is absolutely the pool of capital now allocating into the data centre sector,” Kao Data Chief Financial Officer Matt Harris said.
“I’ve been in the industry for about a decade, and we’ve seen three phases, where data centres were a kind of alternatives, then it was largely driven by infrastructure money and digital infrastructure, and now you’re seeing real estate capital prevalent.”
In Cannes, Geneva-based investor Stoneweg CEO Jaume Sabater described investment opportunities in data centres as a “major target,” while Christof Winkelmann, member of the management board at Aareal Bank, said the German bank was looking to debut in data centre lending in 2025.
Last year, pension fund AustralianSuper made a $1.5B investment in U.S. firm DataBank, and it is on the lookout for investments in Europe. And fund manager Castleforge announced a move into the sector with the development of a scheme near London.
No surprise, then, that the sector was named the most promising by investors in the Urban Land Institute’s global survey of 3,000 real estate leaders.
In January, Europe’s largest cloud and AI data centre, DC01UK, received planning permission from Hertsmere Borough Council. The scheme, the owners of which are advised by Knight Frank, totals more than 2M SF and has a power reservation of 400 megavolt-amperes from the National Grid. Construction is estimated at £3.75B.
“Data centres may have been caught up in the buzz of alternatives, but for many of the more generalised real estate investors, they have been trying to understand the value-add of a sector where the desirable locations mirror the industrial sector, linked to the power grid and fibre network, which in broad terms follows the major motorway networks,” Knight Frank Global Head of Data Centres Stephen Beard said.
“But compared with industrial at, say, £100 development cost per SF, the base build for a data centre is at least double that, plus the M&E costs, so a typical 30-to-50-megawatt scheme is going to cost between £300M to £500M. That capex requirement gets rid of around 80% of interested parties,” he said.
Beard said that operational and build complexity previously acted as a deterrent, but a “more commoditised” product plus more operational service delivery have made it easier for real estate capital to find a route to managing risk.
“A major driver is the approach of valuers, who are now totally familiar with data centres,” he said. “If it’s in the right location, it’s got the connectivity, it’s got the power, we just don’t see these big deltas anymore between buying something as data centre land and your valuation. And that’s made it a lot easier for the real estate sector to get involved.”
The growth of capital into the sector from real estate investors won’t be instantaneous but is likely to grow over the next decade, mirroring a trend in the U.S. This week, Related, a company best know for large-scale urban mixed-use projects, said it was looking for $8B of equity to build out a $45B U.S. data centre pipeline it had pieced together.
“It’s not going to be 2025, per se, because it takes five to 10 years to develop a data centre, but there’s a supply-demand imbalance at the moment, and with the U.S. something like 70% of the global market, that doesn’t make sense,” Legal & General Managing Director of Private Markets Matteo Colombo said.
The UK domestic market is largely dominated by west London, but Colombo, who leads a team that has been in the market since 2019, said that could be set for realignment, with east London to rival the west over time.
While London accounts for 80% of current provision, the search for power is expanding geographies. Kao Data started construction of a £350M, 40 MW data centre in Manchester in October, with the 279K SF facility expected to be open in 2026. It is also expanding its Harlow campus with L&G to around 100 MW.
Meanwhile, Microsoft acquired land at Skelton Grange in Leeds for circa £106M for a hyperscale data centre due to open in 2026. In early March Blackstone received outline planning permission for a £10B QTS data centre on a derelict industrial site in Blyth in the north-east, which once housed the now-defunct battery producer Britishvolt.
Kao’s Harris pointed to Aermont’s acquisition of Spanish data centre operator Nabiax late last year as an example of a real estate investor opting for exposure to the sector and outbidding specialist rivals, likening it to the evolution of life sciences in the UK.
However, there are questions about whether the power grid can keep up.
Courtesy of Kao Data
Kao Data is working on two major data centre projects in the UK.
“The UK is in a seriously dangerous position,” Knight Frank’s Beard said. “There is a political objective to become an AI superpower, but the challenge is our archaic grid network and how we’re asking an organisation like National Grid to act in an entrepreneurial way, yet it can’t guarantee power to new sites until 2034.”
Wholesale change in the system is needed, but there is a short window of opportunity, because otherwise, that demand will go to countries like France and Italy, Beard added.
One major issue is the number of connections promised to battery storage developments, which is at four times the actual demand.
“There is work being done to flush those zombie applications out, but we estimate that with these and other power challenges, around £40B of investment is at risk,” he said.
The biggest recent announcement came from Segro, which has formed a 50-50 joint venture with Oaktree-owned Pure Data Centres to create its first fully fitted, 56 MW data centre in Park Royal. Gross capital investment is anticipated at circa £1B for a 323K SF, three-storey building, ready for customer use from 2029. Segro has assembled UK and European land and secured access to power for a potential portfolio with 2.3 gigawatts of power capacity.
“For us, the cloud and AI user interface are the core markets, and by any measure, the market is seeing double-digit growth in demand, supported by very strong hyperscale tenants,” Segro Chief of Staff Andrew Pilsworth said. “Currently, the investment market is very much focused on development opportunities, and it will be interesting to see how the completed data centre market evolves and whether it becomes more liquid.
“Our project with Pure DC is very much another tool in the toolkit. It builds on our expertise in developing powered shell and core buildings and on transacting powered land, and it gives us another option. It makes a lot of sense for us because it plays to our strengths while partnering with a business experienced in design, project management and tenant negotiation. We can see the need to be nimble, and while I can certainly foresee us using this model again, I suspect we will develop with a mix of site-specific approaches.”
Pilsworth also warned over power capacity, and while Segro has power provision across its development sites, power constraints remain a major challenge, especially in the UK.
“Not only does the development of more infrastructure need to adapt from demand originally intended to serve the industrial Midlands and north, but it needs to be low-carbon,” he added. “We will be exploring on-site generation, but realistically, data centres are such big power users that, for example, solar is likely to be from solar farms rather than simply from on-site solar.”
Other mainstream investors are also establishing a presence in the market. Legal & General, specialist digital infrastructure investment firm Goldacre and data centre development partner sineQN announced in October that planning had been approved for a £750M hyperscale data centre investment in Newham. The proposed development is expected to have a capacity of 80 MW by early 2027.
“One size no longer fits all, and the scale of the business has changed dramatically. It used to be smaller footprint, smaller megawatts, smaller capital amounts,” L&G’s Colombo said of a business in huge transition. “A 30 MW data centre was massive, and today in Europe 100 MW is massive. In America, it’s 1 GW.”