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Ascendas REIT launches European data centre takeover with $672m M&A spree

Real Estate Investment Trust’s property portfolio of data centre buildings and others is estimated to top US$11.14 billion with the addition hosting assets acquisition.

By João Marques Lima

Founder and Editor, The Tech Capital

9 Mins

March 17, 2021 | 2:25 PM GMT

Ascendas Funds Management, in its capacity as the manager of Ascendas Real Estate Investment Trust (SGX-ST: A17U), has announced a proposed acquisition of a portfolio of data centres located across Europe for S$904.6 million, about US$671.57 million, from subsidiaries of Digital Realty Trust.

The portfolio comprises 11 data centres located across the UK (4 properties), the Netherlands (3 properties), France (3 properties) and Switzerland (1 property).

Ascendas Reit, through its wholly owned subsidiaries, has entered into a sale and purchase agreement with Digital Realty and is expected to complete the first phase of the proposed acquisition in UK time before the bell rings later today.

The total consideration of S$904.6 million is in line with the independent market valuations of the target properties, which amount to S$905.0 million (~US$671.87 million).

Ascendas Reit is expected to incur an estimated transaction cost of S$55.4 million (~US$41.13 million), which includes stamp duty, professional advisory fees, and acquisition fees payable to the manager in cash (being 1% of the total consideration of S$904.6 million, which amounts to approximately S$9.0 million (~US$6.68 million)).

The total acquisition cost of S$960.0 million (~US$712.7 million), will be financed with proceeds from the equity fund raising announced on 10 November 2020, debt financing and/or internal cash resources.

The 11 data centres have a total net lettable area of 61,637 sqm. Six data centres are located on freehold land whilst the remaining five data centres are sited on leasehold land with a weighted average land lease to expiry of 42.9 years.   

Including the Target Portfolio, Ascendas Reit will own 212 properties – including data centres, business and science parks, suburban office properties, high-specifications industrial properties, light industrial properties, logistics and distribution centres, and integrated developments, amenities and retail properties – worth S$15.0 billion (~US$11.14 billion) comprising 96 properties (S$9.0 billion (~US$6.68 billion)) in Singapore, 37 properties (S$2.1 billion (~US$1.56 billion)) in Australia, 49 properties (S$1.7 billion (~US$1.26 billion)) in the UK/Europe and 30 properties in the US (S$2.1 billion (~US$1.56 billion)).

Target Portfolio Statistics
Location & Number of Properties11 data centresLondon, UK: 3 propertiesAmsterdam, Netherlands: 3 propertiesParis, France: 3 propertiesManchester, UK: 1 propertyGeneva, Switzerland: 1 property
Land Area136,816 sqm
Land Tenure (by asset value)Freehold: 6 propertiesLeasehold: 5 properties[16] with weighted average land lease to expiry of 42.9 years
Total Net Lettable Area61,637 sqm
WALE (by gross revenue)4.6 years
Occupancy Rate97.9%
Total Number of Customers14
Lease Structures (by rental income)58% triple-net 42% colocation

William Tay, executive director and chief executive officer of Ascendas REIT, said: “This acquisition gives us a unique opportunity to own a portfolio of well-occupied data centres located across key markets in Europe. It complements our existing data centre portfolio in Singapore and will increase the sector’s contribution to S$1.5 billion (~US$1.11 billion) or 10% of investment properties under management. 

“We see good potential in the data centre business and will continue to source and make further acquisitions when the opportunities arise.”

In its announcement of the proposed acquisition, Ascendas REIT also shared seven point in which it bases its decision to go ahead with the large acquisition of data centre assets in Europe. The key merits of the proposed acquisition include:

1.    Enlarges Ascendas Reit’s exposure to the resilient data centre asset class

Demand for data centres is expected to grow due to increasing reliance on data and online applications as well as accelerating digitisation across industries.

Some of the key trends that continue to underpin demand for data centres include the increasing adoption of cloud computing, the growing number of internet users and mobile devices, larger data storage requirements and fast-growing technology trends such as big data analytics, Internet of Things (IoT), Industry 4.0, 5G network, e-commerce, video streaming services etc.

Additionally, data sovereignty laws are expected to benefit the European data centres as companies choose to store data within Europe to serve the large local markets.

The Target Portfolio will increase Ascendas Reit’s investment in data centres to 10% (S$1.5 billion) of total investment properties of S$15.0 billion (from 4% or S$0.5 billion as at 31 December 2020).

2.    93% of the Target Portfolio (by asset value) is located in key European data centre markets

The Target Portfolio comprises 11 data centres, of which nine (93% of Target Portfolio by asset value) are strategically located in London, Amsterdam and Paris, which are top data centre markets in Europe.

London, Amsterdam and Paris are ranked the first, third and fourth largest colocation markets in Europe respectively, with a combined colocation market size of approximately 1,383 megawatts (“MW”) as at 31 December 2020.

They benefit from being close to large population centres and have the connectivity and infrastructure to attract the data centre providers.

3.    European data centre markets are recording strong capacity growth driven by robust take-up levels

According to CBRE, take-up of colocation data centres outstripped new supply in 2020 across the FLAP markets as more companies embark on their digital transformation plans.  Companies are increasing their consumption of cloud services, in turn driving colocation demand from cloud providers. Colocation is also increasingly being used to satisfy companies’ IT requirements which are growing in scale and complexity.

During 2020, a total of 201 MW was taken up in FLAP markets (Frankfurt 67 MW, London 86 MW, Amsterdam 32 MW and Paris 17 MW) on the back of new supply of 174 MW (Frankfurt 62 MW, London 26 MW, Amsterdam 57 MW and Paris 29 MW). 

As a result, FLAP markets’ vacancy rate improved to 19% (from 21% in 2019). In 2021, vacancy rate is expected to fall further to 17% driven by strong demand. Market absorption, which is the number of years it would take current vacant supply to be fully let was 2.4 years as at 31 December 2020 (down from 3.0 years in 2019) and is expected to decline to 2.3 years in 2021.

4.    Improves diversity of Ascendas Reit’s portfolio and offers more freehold land

With the Proposed Acquisition, Ascendas Reit’s portfolio will be geographically diversified, with 60% of investment properties in Singapore, 14% in the US, 14% in Australia and 12% in the UK/Europe. 

Approximately 67% of the Target Portfolio (by asset value) is located on freehold land whilst the remaining 33% is on leasehold land with a weighted average land lease to expiry of 42.9 years. Ascendas Reit’s portfolio will further strengthen from the increase in proportion of freehold land (by asset value) from 35.4% to 37.5% assuming completion of the acquisition of the Target Portfolio. 

5.    Stable and sustainable income stream with long weighted average lease to expiry (WALE) and triple net lease structures

The target portfolio has a long WALE of 4.6 years by rental income. About 83% of the leases (by rental income) have embedded annual rent escalations of between 1.0% to 3.0%, providing organic growth. 

As of 31 December 2020, 58% of the target portfolio by rental income is leased on a triple net basis where all property outgoings such as maintenance, tax and insurance are borne by the tenants. The remaining 42% comprises leases within colocation data centres where Ascendas Reit will own the M&E and is responsible for property outgoings.

6.    Strengthens overall customer base with high-quality companies

The Target Portfolio is 97.9% occupied by 14 high-quality and established customers. These customers operate in a range of industries such as financial services, telecommunications, information technology, retail (supermarkets) and education, and are leasing the properties for their data centre requirements.

7.    Distribution per Unit (“DPU”) accretive acquisition

Net property income (NPI) yield for the first year is approximately 6.0% and 5.7% pre-transaction costs and post-transaction costs respectively. The pro forma impact on the DPU for the financial year commencing on 1 January 2020 and ended 31 December 2020 is expected to be an improvement of 0.189 Singapore cents assuming the Proposed Acquisition was completed on 1 January 2020.

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João Marques Lima

Founder and Editor, The Tech Capital

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