Why data centers are becoming a hot trend in real estate investment

At our KPMG Plage gathering for the investment industry in June, much discussion centered on the current state of the real estate market and the investment opportunities arising. Historically, the market has focused on well-established sectors such as offices, logistics, retail, and residential properties, but the market landscape is evolving – and a standout feature at our event was the extent to which data centers are featuring in investment strategies. It’s no exaggeration to say that they are rapidly transitioning from a niche segment to a core asset class.

Given the considerable amount of time spent on social media, online viewing platforms, and the use of AI, the demand for data centers now extends far beyond large technology companies. We are seeing a structural transformation that has the potential to redefine the asset classes in which asset managers invest, a shift that is increasingly evident in the portfolios we audit and provide advisory services over.

At their core, data centers are just buildings. However, unlike logistics assets that store tenants` products, data centers house the servers that power a wide range of critical services – from cloud computing and artificial intelligence to video streaming and financial transactions.

Since the demand for data and computing power have significantly increased, there is a growing demand for reliable, secure and high-performing digital infrastructure.

Data centers can offer a compelling investment opportunity for several reasons:

• They typically benefit from long-term leases with blue-chip tenants, including major cloud service providers and government entities
• Data centers are adaptable and can be run along various models which can be attractive to an asset manager. For example, similar to hotels, a property owner could hand over the operations via a lease to a data center operator.
• Location remains important, but unlike traditional office or commercial properties that require central urban settings, data centers are strategically located based on access to essential resources such as cheap power and water for cooling systems.
• Data centers provide portfolio diversification beyond traditional sectors like office, retail, and logistics.
• Finally, the investment thesis for digital infrastructure tends to be decoupled from economic cycles or market volatility, providing resilience and stability amid broader market fluctuations.

There is a marked and growing interest among investors, particularly within Luxembourg-based funds such as RAIFs and SIFs, which are increasingly directing a larger share of their capital allocation toward digital infrastructure. This investment is being made both through direct acquisitions of data center assets and indirectly via broader digital infrastructure strategies, reflecting the recognition of data centers as a critical and expanding component of modern real estate portfolios.

From an audit perspective, our primary focus remains on the valuation of these types of assets, taking a number of factors into account, including: 

• Power usage and cost assumptions
• Capex cycles and upgrade risks
• ESG compliance, including energy efficiency and carbon impact
• Tenant concentration risk, which can be similar to a logistics portfolio

These factors affect data center valuation through cash flow projections and risk assessments. Improved power usage lowers operating costs, increasing profit margins and investor appeal. Capex cycles and upgrade risks impact reinvestment needs and asset lifespan, with risk levels contingent on how easily the infrastructure can be adapted or upgraded. ESG compliance is gaining importance among investors, although valuation premiums vary depending on regulatory frameworks. Finally, high tenant concentration is relatively common, making lease security and tenant quality important considerations as a good long-term tenant can stabilize the asset valuation.

Additionally, a number of industry statistics and forecasts indicate the extent of the growing importance of data centers as a real estate investment class, including:

• Global data center market growth:
  The global data center market was valued at approximately $342 billion in 2024 and is projected to reach $517 billion by 2029, growing at a compound annual growth rate (CAGR) of 8.6%.
• Soaring demand for digital infrastructure:
  Global internet traffic is expected to reach 6.6 zettabytes per year by 2026, up from 4.8 zettabytes in 2023, fueling the need for more data center capacity.
• Investment surge:
  In Europe, data center investment volumes reached €8.4 billion in 2024, a 44% increase year-over-year, with Luxembourg-based funds such as RAIFs and SIFs allocating a growing share of capital to this asset class.

Data centers are becoming an essential part of modern real estate portfolios. Offering stable returns, underpinned by robust demand drivers and expanding institutional interest, data centers have evolved beyond their status as an “alternative” asset class to become a fundamental element of core real assets.

However, there are some challenges to entry into this investment class, notably environmental considerations such as heat management and the substantial power requirements necessary to operate the facilities. That is why obtaining sound professional advice around potential investment opportunities is essential, in order for a comprehensive cost-benefit analysis to be run. At KPMG Luxembourg, this is something that our experienced team of specialists are able to assist with. Our Deal Advisory team in Luxembourg is also at your service should you require support with valuations, valuation reviews, acquisitions, or disposals.

If you’re in the business of long-term real estate investing, data centers should already be on your radar. They’re firmly on our radar too – so if you would like to discuss in more detail, please don’t hesitate to get in touch.