All aboard the AI-data centre gravy train

In this issue:

• All the ways you can get in on data centre plays
• The tidal wave of “non-dom” money headed for Singapore’s shores

Good morning, BT readers.

If Hollywood were to remake The Graduate today (why not? It’s remade everything else), the movie’s iconic scene would be resurrected with two words instead of one: “Data centres.” 

Today’s boomer would cryptically tell today’s Dustin Hoffman: “There’s a great future in data centres. Think about it. Will you think about it?” 

Any real estate investment trust (Reit) aficionado would have certainly thought about it, for this asset class is powering some of the stronger Reit showings in the latest earnings season. 

If buildings filled with black boxes fail to excite you, think of them as the humming epicentre of the artificial intelligence (AI) revolution – some very serious money is being poured into some very serious infrastructure just so we can make ChatGPT write our e-mails for us.

What’s happening?

Keppel DC Reit now has a seventh consecutive quarter of positive reversions under its belt. In Q3, one of its major contracts saw a positive reversion of more than 40 per cent – a development that JPMorgan reckons will continue into 2026. 

Another data centre Reit, Digital Core Reit, saw its distributable income grow 9.7 per cent for the first nine months of 2024, driven by the AI sector’s growth. The Reit snatched victory from the jaws of defeat, increasing its annualised rent in Frankfurt by more than 85 per cent when it had been bracing itself for a 50 per cent decline. 

And last week, Mapletree Industrial Trust posted a 1.5 per cent increase in Q2 distribution per unit on the back of “robust operational performance”. Data centres currently make up almost half of its assets. 

Why it matters

Even so, the path to riches via data centre Reits isn’t a straightforward one. Year to date, Keppel DC Reit is up almost 18 per cent, but Digital Core Reit is down about 8.3 per cent. 

Like any other Reit, idiosyncratic factors matter – Digital Core Reit spent 2023 dogged by the bankruptcy of its second-largest tenant, which created a leasing situation that it has since resolved. 

The sector as a whole also remains at the mercy of still-high interest rates or potential oversupply.

In any case, there is more than one way to ride the AI-data centre gravy train, and some investors are already on board. Where there are data centres, there are also assorted things, such as cooling systems, magnetic inductors and fans. These infrastructure item manufacturers – together with chipmakers and server builders – have combined to fuel a 40 per cent rally in Taiwan’s benchmark index over the past year. 

All of that computing and cooling needs a lot of power, and Goldman Sachs reckoned earlier this year that data centre power demand will grow 160 per cent by 2030. A single ChatGPT query, apparently, uses 2.9 watt-hours of electricity, compared with 0.3 watt-hours for a Google search.

In the US, analysts have tapped players such as utilities firm Southern Co and renewable power company NextEra Energy as counters to watch.

Even so, caveat emptor applies. Share prices have run up, for one thing – Southern Co’s stock has hit all-time highs. Also, server maker Super Micro is experiencing investors’ ultimate toe-curling event: its auditor, Ernst & Young, resigned because it was “unwilling to be associated” with the company’s financial statements. Super Micro’s stock plummeted some 40 per cent on the news last week. 

All this before we even know if there will ultimately be enough demand for everything the boxes in these buildings will put out. Speculative investment frenzies often lead to high rates of capital incineration, Sequoia Capital’s David Cahn cautioned in June. Already, investors punished Meta and Microsoft last week over rising AI costs and unmet AI expectations. 

Even so, the money going into data centres is real – Sequoia’s Cahn has deemed 2025 the “Year of the Data Centre”. Doesn’t have the same ring as “The Year of Plastics”, but it’ll do. 

The big number: 74,000

A small army of ultra-rich folks are looking for a friendlier taxman and a new address to give him, and some of them are headed to Singapore. 

The UK is set to abolish the non-domiciled – or “non-dom” – tax status of some 74,000 super-wealthy foreign residents. Non-doms are UK residents whose permanent homes (or domicile) are abroad for tax purposes. They do not have to pay taxes on income earned overseas. 

This arrangement is set to end in April next year, and the group that The Economist calls the “ticked-off well-off” are on the hunt for their next postal code.  

Among the 74,000, there’s rich, and then there’s rich. Of the lot, about 10 centimillionaire families are “seriously considering” Singapore for their next move, according to David Lesperance, managing partner of Lesperance & Associates, which counts them as clients. 

Across the island, real estate agents and wealth managers are rubbing their hands in anticipation. Inquiries have grown by “strong double-digits” since late 2023, Lee Woon Shiu, DBS Bank’s managing director and group head of wealth planning, family office and insurance, told BT. 

This tidal wave of money is also set to flow into properties in prime areas such as Orchard Road, Nassim and Sentosa. 

How this will shake out for any country that hosts or loses the wealthy is debatable. By some calculations, the flight of the non-doms is expected to cost the UK government nearly £1 billion (S$1.7 billion) a year in lost revenue. By others, doing away with the favourable tax arrangement is supposed to raise £2.7 billion a year by 2028-2029.

Time to holster your pitchfork for now. 

(Disclosure: I own shares in Keppel DC Reit, Digital Core Reit and Mapletree Industrial Trust.)

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