Investing through a winter of discontent
The term “Winter of Discontent” was used in the opening line of Shakespeare’s...
Just as power, water and road infrastructure are essential for us to live our everyday lives, so digital equipment and systems are becoming equally important. But it was the global pandemic which brought it to the fore.
Take the McDermott household as an example. I was one of the millions who was working exclusively from home; my children were being taught remotely; we bought our groceries online and our communication with the outside world was done exclusively via mobile phones, social media and Zoom calls.
And the importance of this growing theme cannot be understated. For example, while many of us knew doctors and nurses were seen as key workers during the pandemic – did we all know that people working in mobile towers and data centres were given the same status?
So, is this a fad or a trend? A lot has been written about the reversal of certain trends now the pandemic is hopefully behind us – online subscriptions for Netflix falling markedly comes to mind. But make no mistake, the digital move is here to stay and is already embedded in our everyday lives with figures showing that by 2025 we could see as many as 5,000 digital interactions per user per day*.
Digital technologies are now embedded in our everyday lives. And for me, digital infrastructure covers three specific areas – mobile towers, data centre and fibre optic cables.
Macro towers are the big metal poles people don’t like to see from their back garden. They have high barriers to entry with control limited to large global companies, who outsource to providers. Data centres are effectively big industrial warehouses, full of servers with fortress-like security. They house the data, processing and AI systems – think of the likes of YouTube and other content providers. Fibre optic, meanwhile, is like the nervous system connecting all of these things.
The things we took for granted in the physical world prior to Covid all went online and, in many instances, have stayed that way – creating significant growth opportunities. A good example is that just six years after launch in 2016, short-form video app Tik-Tok had received over 3 billion downloads, making it the most popular app of 2020**. This was a move driven heavily by the inability to interact face-to-face, courtesy of the pandemic.
Gaming revenues also grew 27 per cent, while the likes of Facebook (Meta) have committed heavily to spending over $10 billion per annum to build out the Metaverse, requiring vast amounts of data centre space**.
Importantly, the pandemic has created a paradigm shift in many of our work and living patterns. As M&G Global Listed Infrastructure manager Alex Araujo said: “The shift will be somewhat permanent with more flexible working arrangements, and, in some cases, digital infrastructure will replace the need for transportation infrastructure, where people choose to hold meetings virtually rather than face-to-face, at least in the short-to-medium term.
There is also a two-speed growth dynamic taking place within digital infrastructure globally. On one level you have Western countries looking to move from 4G to 5G. While they have good existing digital infrastructure, it needs to be both upgraded and expanded. Faster downloading of items or improving online gaming are examples which come to mind.
The other part of the story is emerging markets. Many of them are moving from 2G to 3G but they won’t have the mobile towers or data centres the developed world has, so the story is only just kicking into gear. To put this into context, the US has a population of 330 million and around 2,500 data centres, while India has a population of 1.6bn and only 127 data centres.
Like the wider listed infrastructure asset class, digital infrastructure also has the ability to pass on inflation to its customers. Ben Forster, a portfolio manager on the Schroder Digital Infrastructure fund highlights macro towers as a good example.
He says: “The amount of internet users is growing rapidly. This means mobile network operators, who are the tenants of macro towers – the likes of Vodafone in the UK and T-Mobile in the US – need to spend billions of dollars to upgrade their radio equipment to send that 5G signal. It’s a slow process to build these towers, so they rely on outsourced mobile tower companies.”
These businesses tend to have long-contracts and inflation-proofing built in. There is also a strong argument that the exponential growth of the asset class also gives it an element of protection against recession – as it has become so heavily embedded in our lives as the likes of schools, hospitals and emergency services all rely on digital infrastructure to operate.
An Ernst & Young report in collaboration with the Digital Infrastructure Providers Association (DIPA) estimated the sector needs an investment of up to $23 billion by 2025, to support the growing demand for digital services and rising online traffic***.
The report found as many as 330 million people will be using 5G, while sectors like e-commerce, education and healthcare will grow their presence online. To meet the demand, it says investment in the range of $7-$9 billion each for macro tower additions and fibre deployments, $2-3 billion for outdoor small cells which will be important for 5G the roll out, $500-800 million in Wi-Fi and in-building solutions, $500-700 million in edge data centres and $500 million in data centres***.
This focuses on the data centre operators – not the ones in the sky! As Forster highlights the physical role of data centres in this growth. “Today, 95 per cent of organisations are implementing a digital-first strategy, yet according to market intelligence firm IDC, 56 per cent of data centre capacity remains on-site in legacy enterprise data centres, which are inefficient and prone to outages.
“Outsourcing these computer workloads to third party shared (co-location) facilities offers corporate decision makers greater business resiliency, project scalability and cost efficiencies. Forecasters estimate co-location leasing growth of 7-13 per cent per annum depending on region, with hyperscale cloud facilities growing at over 22 per cent per annum from 2020-2025. In aggregate this will require $1.3 trillion of capital expenditure over the period.”**
All over the world, a growing proportion of the population lives in cities. In 2010, 51.6 per cent lived in urban areas. By 2020, the share of urban population increased to 56.2 per cent. It is generally higher in the developed world (79.2 per cent in 2020) than in the developing world (51.6 per cent).
Figures from the UN expect urbanisation to increase to 68 per cent by 2050 – consider this growth in context of the rising global population in that time and it indicates the world could see an additional 2.5bn people in urban areas by 2050, with close to 90 per cent of the increase taking place in Africa and Asia****. All of this will require increased digital infrastructure to cater for these growing numbers.
Think of all the things you do in a single day that take 60 seconds. Make your bed, put the breakfast dishes in the dishwasher, etc. In that 60 seconds there will have been 5.7 million google searches conducted and 272,000 apps and games downloaded – and those numbers are only going to get bigger! You can’t argue with the tailwinds for this asset class.
Funds worth considering include Schroder Digital Infrastructure or M&G Global Listed Infrastructure, both of which also offer clients an attractive income too. Another consideration is VT Momentum Diversified Income fund, which has exposure to the asset class through a couple of specialist trusts.
*Source: Knight Frank Projection – taken from Gravis Capital website
**Source: Schroder research note