The shift to a digitalised world since early 2020, in pursuit of more convenient ways of working, living and playing, has highlighted the need to modernise digital communications networks.
The trend is fuelled by the acceleration in online activity during Covid-19 – from speaking to colleagues remotely, food shopping online or monitoring ‘smart home’ devices. “[The] pandemic has cemented our addiction to fast and reliable internet access,” said Ben Forster, equity analyst, global real estate at Schroders.
As a result, digital infrastructure is expected to emerge stronger from Covid-19.
Cloud-based platforms such as Amazon, Zoom, Netflix and Ocado have already been capitalising on the opportunity.
“[They] invested heavily in scalable digital infrastructure before the pandemic, in the form of software platforms and computer servers,” explained Forster. “This infrastructure enables them to securely process our orders, optimise logistics routes and deliver content on demand.”
Delivering future returns
According to Schroders, digital infrastructure is a rapidly evolving yet often overlooked asset class, backed by resilient income streams.
“We think it has an essential role to play in promoting future economic growth, with cities that under-invest likely to lose global competitiveness,” said Forster.
“Our focus is on real assets in the world’s leading cities,” he added. “It is clear to us that high quality digital infrastructure in these cities is becoming increasingly valuable as it sits at ‘the edge’ of the network, close to high volumes of customers and data.”
China’s announcement of a US$1.4trn stimulus package, for example, shifted focus from traditional infrastructure, such as roads and bridges, towards new infrastructure for the digital age.
“It is likely to target investments in artificial intelligence, data centres, 5G base stations, ultra-high voltage power, electric vehicle charging, industrial internet of things and intercity transit,” explained Forster.
Similarly, the EU is prioritising digitisation as part of its €750bn ($890bn) Covid-19 stimulus package. “We believe that digital infrastructure will remain firmly at the centre of the debate, as economies recover from the pandemic,” he said.
Desire for data
Schroders sees data centres as playing a “mission critical role” for their occupiers and have demonstrated extreme income resilience during the pandemic, with high rent collection and low levels of bad debts.
“They enable cloud-based services such as Netflix by housing computer servers and offering access to internet exchanges that transmit data to subscribers who stream their content,” said Forster.
What is less visible, he added, is that these data centres and exchanges rely on a largely hidden external network of millions of fibre optic cable miles, cellular base stations, towers and countless signal transmitters.
These networks are also critical for emergency responders, military communications and any other service that offers data access outside of a private local network. This includes Fifth Generation (5G) cellular technology that promises to accelerate mobile download speeds by up to 100x compared with those offered by Fourth Generation (4G) technology.
“5G should enable emerging bandwidth-hungry technologies, such as driverless cars, online gaming and smart factories, to operate smoothly,” Forster explained.
Careful portfolio planning
Physical attacks on cell towers, however, have highlighted the challenges involved in the roll-out of new technologies.
As a result, in addition to such ESG risks, investors in this sector need to pay close attention to technological advances, such as quantum computing, which could disrupt traditional models.
“Investors able to navigate these changes and spot the global cities most likely to succeed could uncover some very interesting opportunities,” added Forster.
