A low-profile property trust’s data centre gambit

AS THE Singapore market prepares to welcome NTT DC Reit next week, another locally-listed property trust has hatched an intriguing plan to ride the widely expected surge in demand for data centres around the world.

In announcements over the past fortnight, Stoneweg Europe Stapled Trust (Sert) said it has made a 50 million euro (S$75 million) investment in a fund – dubbed AiOnX – that holds a portfolio of five high-specification hyperscale data centre sites, located in Ireland, Denmark, Spain, Italy and the United Kingdom.

These five sites span more than 270 hectares and have secured, reserved or are in the process of applying for more than 2,000 megawatts (MW) of power capacity – which is equivalent to more than 14 per cent of Europe’s current operational data centre capacity.

“Driven by accelerating digital infrastructure needs and a scarcity of power-zoned, permitted land – particularly for AI and cloud workloads – the sector presents compelling long-term fundamentals,” Sert’s managers noted in a Jun 24 announcement.

The total gross development value of the five sites held by AiOnX is projected to be well over 30 billion euros over 15 years. However, the AiOnX fund itself has a 10-year life span, and some projects may be sold before the entire development is completed.

Sert’s 50 million euro investment will give it a stake of between 4 and 8 per cent in AiOnX, depending on the amounts eventually raised from other investors. Sert’s sponsor group is currently the majority owner and manager of AiOnX.

Sert’s managers said in the Jun 24 announcement that the investment in AiOnX will complement its existing data centre holdings in Denmark and Poland. These assets account for less than 2 per cent of its property portfolio, and have thus far been classified as logistics and office properties.

Sert owns properties across Europe, with a book value of 2.25 billion euros. More than half of these are classified as logistics or light industrial properties.

Going for growth

On the face of it, Sert’s investment in AiOnX is a smart way to gain exposure to a hot asset class – especially given its high gearing of 41.7 per cent, and the relatively low market valuation of its stapled securities.

Real estate investment trusts (Reits) usually invest in stabilised, income-generating assets. By contrast, AiOnX offers early exposure to a portfolio of data centre assets, with material cash distributions likely to come only at redemption of the fund.

As its data centre sites are developed, the value of AiOnX is likely to grow, and boost Sert’s net asset value (NAV). It could then choose to realise some of these development-led gains by reducing its stake in AiOnX, or invest more in the fund in order to capture further upside.

Sert made its investment in AiOnX through its recently created business trust. Back in April, Sert – then known as Stoneweg European Reit – said it would form a business trust, distribute its units as a dividend in-specie, and then “staple” them to its own units.

A key rationale for this exercise, completed in June, was to reduce Sert’s reliance on passive rental income and enhance its growth potential. With a business trust in its fold, Sert has more flexibility to take on development activities.

The big question is whether Sert’s investment in AiOnX will boost investor interest in its stapled securities. With a foreign sponsor group and a portfolio of faraway assets, it does not have a broad investor following. Would pursuing a strategy that might do more to boost its NAV than its distributions make it any more popular among yield-focused investors?

Europe, data-centre boom

Sert has a few things going for it right now. For one thing, analysts and investors have turned more positive on European stocks this year. Further rate cuts by the European Central Bank could maintain the bullish tone in these markets.

The listing of NTT DC Reit will soon also expand the number of data centre plays in the Singapore market, which may help develop investor interest in this asset class. In particular, Sert’s investment in AiOnX could provide an interesting contrast to the usual strategy of acquiring income-producing assets.

NTT DC Reit, for instance, has a right-of-first-refusal agreement with its sponsor covering data centres with a combined capacity of more than 2,000 MW. Of this, assets comprising 130 MW of capacity have been identified for potential acquisition within five years – which would more than double NTT DC Reit’s initial portfolio capacity of 90.7 MW.

Most importantly perhaps, Sert is currently trading at an undemanding historical distribution yield of 9.3 per cent, and 0.77 times NAV. Pure-play Keppel DC Reit is trading at a yield of 4.3 per cent, and 1.43 times NAV. Mapletree Industrial Trust, which has a more than 55 per cent exposure to data centres, is trading at a yield of 6.7 per cent and 1.2 times NAV.

Despite its low market valuations, Sert delivered a decent total return of 12.9 per cent over the turbulent past five years, up to Jul 4. Keppel DC Reit returned 12.8 per cent over the same period, while Mapletree Industrial Trust returned minus 9.1 per cent. The iEdge S-Reit index returned 2.7 per cent.

Even if Sert is years away from having significant exposure to the data centre space, there seems to be little downside to betting on its future in that hot, new field.