Investors looking to invest in data centre REITs need to do their homework and due diligence.

The AI boom has reshaped the data centre landscape at a pace few anticipated. The sector is evolving rapidly, driven by the growth in spending by large US ‘hyperscalers’ such as Amazon, Alphabet and Microsoft. These companies are pouring billions of dollars into AI and expanding cloud capacity, providing tremendous opportunities for REIT investors, says Quay Global Investors assistant portfolio manager, Gavin Truong.

But Mr Truong said not all data centre REITs are created equal, and investors need to understand what to look out for when investing in this sector.

“The US hyperscalers’ budgets for AI and cloud capex have increased almost every time they report quarterly earnings. Notably, these increased capex budgets came despite the release of DeepSeek in January 2025,” he said.

“It is expected they will only keep spending. This investment has been rewarded by the market and share price growth has been incredible, providing the backbone to equity market gains over the past year.”

Projections for additional data centre capacity needed between 2025 and 2030 vary greatly – from around 69 GW to 188GW – but with global capacity at 81GW at the end of 2024, the consensus is for capacity to more than double.

Mr Truong said demand might be insatiable, but the supply of centres could be limited by a shortage of power, which is more of a problem in established data centre markets. This is driving new builds into secondary and tertiary markets, where land and power are relatively easier to secure.

He pointed to RBC estimates that roughly 132GW of potential projects are planned globally in the next 10 years if all landbanks are utilised.

“However, under construction figures are much lower with over 12GW of data centre capacity under construction in North America as at August 2025, up 33 per cent from 9GW in May 2024. Globally there is over 23GW under construction, which is over 25 per cent of total existing stock.

“Given the very high demand, much of those data centres under construction in primary markets are pre-leased – nearly three quarters in the US alone. In North Virginia, 87 per cent of the 2GW under construction is already pre-leased.

“With a typical data centre development taking three years to build (up from two), and mostly pre-leased before delivery, existing data centre capacity in established US markets is in high demand,” Truong added.

“Vacancies in these established markets continue to set new record lows, most recently falling to 1.6 per cent as at June-2025. This is despite an almost triple increase in supply this half (MW) compared to four years ago

“In 2025 market rents for hyperscale leases over 10MW have grown by 13.8 per cent in North Virginia,19 per cent in Silicon Valley and 15.4 per cent in Chicago. This is beneficial for data centre owners that can deliver capacity in these top US markets.”

While data centre REITs obviously remain popular due to these many factors, for an investor it is important to consider which REITs are most likely to thrive, he said.

“We believe those that have a global data centre platform, have meaningful exposure to hyperscale-type data centres, particularly in the US, and are able to develop new data centres, are the most likely to outperform.”

A careful consideration of valuation is also required.

“Some data centres, but not all, have earnings growth that has kept up with share price growth, keeping valuation multiples attractive. The larger companies with diversified global platforms, notably Digital Realty and Equinix, have outperformed. Digital Realty has one of the lowest valuations among its global peers of 19.4 times as at 19 September 2025 and Equinox’s valuation was only slightly higher at 19.7 times.

“In contrast, Australian-listed data centre REITs continue to trade at significant, and in our view, unjustified premiums. DigiCo had a one-year forward valuation multiple of 26.5 times in mid-September and Next DC’s valuation was a whopping 51.6 times,” Truong said.

Investors looking to invest in data centre REITs therefore need to do their homework and due diligence.

“A high share price is not enough, and nor is assuming that all data centre REITs will continue to outperform as demand across the sector grows.

“Investors still need to look carefully at the structure of a REIT, with data centre scale and geographic reach remaining differentiators, and exposure to the US hyperscale market a clear advantage.

“As always, valuation discipline is critical — investors should balance the sector’s compelling growth prospects against current pricing to identify the most attractive opportunities,” Truong said.

The post Hyperscalers boost data centre demand, but care must be taken when investing appeared first on AdviserVoice.

Most of the world’s data centres are in the US, where there are over 5,000 centres, with a combined capacity of over 7,000 megawatts (MW) – more than the combined capacity of the next four largest countries of China, Japan, UK and Germany.

Leasing demand for data centres is derived from two broad sources: hyperscale tenants or very large technology companies like Amazon, Google, and Microsoft, and smaller retail tenants such as banks, companies, and government.

“The demand from AI is being led by hyperscale tenants, or the large US technology companies. The combined annual capital expenditure of Amazon, Microsoft, Google, and Meta has increased by 26 per cent from 2020 to 2023, with forecasts projecting a further 33 per cent increase by 2025,” he said.

“In recent months, global leasing activity has surged, achieving record-breaking levels in each of the past four quarters to 31 March 2024.”

Mr Truong says that remarkably, more megawatts have been leased in this twelve-month period than in the preceding three and a half years.

“Hyperscalers are rapidly absorbing available space and power. Consequently, rents are growing. This looks likely to continue as current power capacity is absorbed and future supply can’t keep up with such strong demand.

The chart below shows the soaring demand for global data centres.

According to Mr Truong, supply is responding to this surge in the need for space and power in data centres. Capacity under construction in the US has grown to just over 3,000MW at the end of 2023. However over 80 per cent of current construction is already pre-leased, compared to around 50 per cent in prior years.

“This significantly decreases the risk of oversupply. Power constraints will also restrict the supply response. Generative AI requires a tremendous amount of power compared to conventional uses. Difficulty sourcing power and procuring generators and transformers are adding multi-year delays to the development timeline of data centres,” he said.

Mr Truong suggests that the potential investment returns are appealing. “With development profits of 40 per-cent-plus and stabilised net operating income yields of more than 9 per cent, developments are proving to be lucrative which may suggest supply could accelerate from here.

“However, due to the long duration (10-15 year) nature of hyperscale leases, strong rental growth does not quickly translate to outsized earnings growth. A significant portion of current rental rolls were signed back when leasing environments were less favourable. Landlords are trying to speed up this process by divesting ‘low growth’ data centres and reinvesting capital into new developments. Nevertheless, it will take time to play out, however the trend is positive.

“Globally there are just five listed pure-play data centre REITs, with exposure to developed markets. Only one of these is listed in Australia and, in our view, it is priced at a premium compared to global peers. At Quay, we have the ability to invest in better opportunities globally.”

The post AI boosts appeal of investment in data centres as supply is constrained appeared first on AdviserVoice.