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1 The data centre event
On 30 September 2025, Travers Smith hosted a bespoke event entitled "Making Data Centres Happen', exploring key themes in the evolution of this essential infrastructure asset class with a panel and a live audience. Several interesting themes emerged from their conversations. This briefing looks at three of the key legal issues that were explored in relation to investing in data centres.
2 Three key questions relating to data centre investment
1. What are the barriers to the development of new data centres?
It has traditionally been said that the main barriers were access to the right land in the right locations, access to sufficient power supply and obtaining planning consent. The high cost of fitting-out a centre is also a significant barrier to new entrants.
The challenge of obtaining planning consent was mitigated when, in December 2024, the National Planning Policy Framework was adjusted to require local authorities to consider the need for data centres when setting local policies and deciding planning applications. Data centres are now classed as Critical National Infrastructure, and can also be opted into the Nationally Significant Infrastructure Projects regime, which means that planning applications are determined by the Secretary of State, rather than local planning authorities. There has been a raft of planning approvals, sometimes in controversial (and fiercely protected) areas of the Greenbelt for large data centre developments. Some have come via appeals (so granted on a national level) and others locally. Data centre need has therefore trumped the protections afforded to the Greenbelt.
In terms of land availability, some of the more recent operators such as the neo cloud companies are much more location-agnostic, which has given rise to so-called 'edge' data centres which are smaller, decentralized facilities located close to end-users or data sources, enabling faster data processing and reduced latency. This is in part facilitated by the UK's strong fibre backbone.
Securing a power supply remains challenging, involving delays of
6 to 7 years. The government has tried to improve the situation by
reforming the connections process and prioritising strategically
significant projects. However, high energy prices and these grid
capacity constraints are still key factors limiting the growth of
the UK data centre sector. Some industry commentators have called
for data centres to be included in energy-intensive industry
support schemes and for reforms to electricity pricing.
2. What sort of opportunities are there for real estate players in the data centre sector?
There are several opportunities to enter the data centre sector, including:
- Many of the larger operators have started to self-build,
meaning that there are opportunities to facilitate site assembly
and land promotion.
- Some traditional real estate companies have bought data centre
operator companies as a way to enter the market.
- Many of the larger infrastructure investors are investing in
digital infrastructure as part of this strategy.
- There are also opportunities for small and mid-market
investors, by for instance acquiring land with a power supply (for
either onwards sale or as development of the data centre for either
letting to an operator or onwards sale) or bare land without
planning or power but in a favourable location (and then obtaining
planning and power).
- At the lowest end of the risk curve, investors can buy the
freehold of a data centre which is already let on a long lease to a
hyperscaler. Operators typically look to sell significant stakes in
these portfolios to release some capital to potentially recycle
back into the business. These types of structures are becoming
increasingly more interesting to real estate investors because they
offer long term stable cash flows.
- The capital requirements for developing data centres have
increased significantly. They are more expensive to build than
previously, as a result of inflation and also changing technical
requirements. This means that from the perspective of operators and
data centre developers, there is a lot of interest in borrowing
this capital from third parties to help grow that business.
- As the industry grows, there are opportunities for more
sophisticated equity financing structures. Several joint venture
deals have been successful recently, showing that there are
structures that give real estate capital an opportunity to choose
where they want to play in terms of their risk return profile. Some
of the heavily negotiated terms are around liquidity because it
takes time to assemble a site, obtain power and planning, build out
the scheme and achieve a letting. There is usually a lock-in period
of four to five years where neither party can sell. One result of
this is that the market is starting to see transactions where
investors are selling their own stakes in a scheme, for example a
75% stake in in a joint venture arrangement.
3. How do data centre investments fare in the context of current and anticipated ESG requirements and regulations?
Data centres are notoriously ravenous users of power and water, and generate high levels of heat and noise. From an ESG perspective then, they might appear to be unattractive investments. However, this does not tell the full story. Due in part to the power supply constraints discussed above, an increasing number of data centres sites now meet some or all of their power needs from on-site renewables. For example, in Dublin, where there is a moratorium on new data centre connections to the grid until 2028, players in that market are looking at gas production and mixed-use fuel systems that could ultimately be refurbished to run on 100% hydrogen in the future. Solar and wind power are also possible energy sources, as well as small nuclear reactors. On-site back-up generators now often use non-petrochemicals such as hydro treated vegetable oil instead of diesel.
In terms of the circular economy model, some of the excess heat produced by a data centre can be directed towards a district heat network to provide energy to future residential developments in that area, or to heat civic provisions such as libraries or swimming pools. For background on how these work, read our short guide to heat networks. The Park Royal Estate in West London, for example, includes a closed loop liquid cooling system to minimise the impact on the local water supply, and a waste heat district heating network will be installed. The first-generation data centres in the UK are also now presenting refurbishment opportunities to developers.
Data centres facilitate access to data and so have a role to play in improving data equity in our societies. Whilst there is inevitably a balance that needs to be struck in terms of the environmental and social cost of our reliance on data and the AI changes that promise to come down the track, there are already day-to-day examples of ESG benefits enabled by data centres that we have become very used to, such as online ways of working which obviate the need for participants to incur carbon emissions by driving or flying to meetings.
Conclusions
The data centre sector is at an interesting stage for real estate investors – developed enough to have established a range of investment opportunities, but still evolving and innovating. Recent developments in AI have accelerated a new wave of interest in data centres worldwide, something which is evident in the UK Government's own focus on data centres and planning policy – and its approach to AI regulation, where it appears to be aiming to be more "tech-friendly" than the EU's AI Act. The real estate sector has always had a role to play in societal change, and the time feels right for the sector to embrace and support this new chapter in how we will all live, work and interact with each other.
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