In my opinion, there are two FTSE stocks — Segro (LSE:SGRO) and Tritax Big Box REIT (LSE:BBOX) — that look set to gain from the anticipated explosion in the demand for data centres.
According to McKinsey & Company, by 2030, $7trn will need to be spent globally on building the physical infrastructure necessary to house the servers and other hardware required to run artificial intelligence (AI) applications.
Closer to home, Barbour ABI has found nearly 100 live UK planning applications for such properties. And reflecting their energy intensity, Mordor Intelligence reckons the capacity of domestic data centres will grow from 2,590 MW in 2025 to 4,750 MW by 2030. That’s equivalent to an average annual increase of 12.9%.
The country’s number one
As the UK’s largest real estate investment trust (REIT), Segro already has a significant foothold in the market.
It owns Slough Trading Estate, Europe’s largest business park and home to the continent’s biggest cluster of data centres. It also leases other warehouses to companies operating in the sector. Its tenants include Equinix and Digital Realty Trust, two of the industry’s largest players.
But its share price has disappointed recently — it’s down 28% since August 2024.
And the commercial property market can be volatile.
However, its balance sheet is strong — its loan-to-value was 31% at 30 June. Also, 73% of its lettable area is located in seven countries in continental Europe, which provides it with a certain degree of diversification.
Another option
Tritax Big Box REIT, the UK’s largest owner of logistics facilities, now has two data centres in its portfolio and has announced plans to build a new one near Heathrow airport.
It anticipates spending £200m on similar properties in 2025 and £100m-£200m annually thereafter. It estimates the annual rental yield will be 9%-11%. Not surprisingly, the trust views the sector as one of its key growth drivers.
As part of its expansion plans, Tritax has made an offer to buy Warehouse REIT. If the deal is successful, it will create a combined £7.4bn property portfolio. The takeover target has 409 tenants at 60 sites in England and Scotland. Immediate cost savings of £5.5m a year are expected.
The proposed merger reflects a trend in the investment trust industry where stock market valuations are often lower than the value of the underlying assets.
This apparent lack of appreciation from investors has frustrated directors and shareholders alike. Tritax presently trades at a 28% discount. Warehouse is valued at 11% less than its book value.
Good for income
One of the principal attractions of REITs is that to qualify for certain tax exemptions they must return at least 90% of rental profits to shareholders. This means they usually offer generous yields. For example, based on dividends paid over the past 12 months, Tritax is presently (15 August) offering a return of 5.6%. For comparison, Segro’s is 4.6%.
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However, the trust’s dividend could come under pressure if interest rates remain at historically high levels. And possible vacancies remain an ever-present threat.
But like Segro, I think Tritax has exposure to a sector that’s going to see significant growth over the next decade or so. Those that agree with me could consider adding either of them to their portfolios.
