#whatstrending feat. Mint Finance 

Ever wondered what is currently driving the local REITs market? #whatstrending addresses some of the most trending questions/topics on the markets for investors. Designed to be educational, expect to get factual, insightful on what is driving sectors and stocks listed on SGX, featuring insights from professionals in the community.

Today, we hear more from Mint Finance’s Pranay Yadav, as he shares his thoughts and views on the impact of Generative AI on data centres.  Pranay Yadav is a Senior Research Analyst at Mint Finance, a Singapore based research and consulting firm offering nuanced and deep insights on global macro and its impact on Singapore stocks, REITs, and ETFs. 

Q1: What has Generative AI got to do with Data Centres?

From Pranay Yadav, Senior Research Analyst, Mint Finance:

Generative AI (or Gen AI in short) thrives on data. More Gen AI means more data. More data equates to more data centres needed. Each click, each swipe, and each algo leap magnifies the demand for data centres. 

Data creation is soaring; More data will be generated in the next five years than over the past 10. To serve additional demand, data-centre capacity will need to grow at an 18.5% CAGR over the next five years. 

AI workloads running servers represent a major demand driver, particularly for data centres with high performance computer offerings such as Hyperscalers.

Q2: What is an efficient and a convenient way to invest into Data Centres?

From Pranay Yadav, Senior Research Analyst, Mint Finance:

Data centre REITs invest in properties including data-storage and server centres. These serve as backbone to the tech sector. As such, data centre REITs are strategically positioned to benefit from the rapid expansion of the data centre market. 

The growth of data centre REITs is driven by five primary forces

1. Demand for data centres to manage artificial intelligence (AI) workloads
2. Proliferation of IoT and cloud services
3. Growing data-sovereignty and data-residency requirements
4. Growing data-storage requirements
5. Co-location and hyper-scaling

Singapore’s REITs & Property Trusts market is Asia’s second largest behind Japan. Home to 41 REITs & Property Trusts with a total market capitalization of around S$100 billion, the portfolio of S-REITS are broadly diversified in regions outside Singapore including the Asia Pacific, South Asia, EU, and US. 

REITs are inversely correlated to interest rates because they often rely on debt for expansion. Higher rates result in higher borrowing costs, and elevated cost of funds lowers profitability. Therefore, a potential reversal of interest rates bodes well for REITs.

Chart 1: NikkoAM-StraitsTrading Asia ex Japan REIT ETF (Stock codes: CFA, COI) against US & SG Interest Rates 

Q3: How have data centre REITs performed relative to the overall S-REITs market?

From Pranay Yadav, Senior Research Analyst, Mint Finance:

Among Singapore REITs with exposure to data centre properties, only Digital Core REIT (DCRU) and Keppel DC REIT (AJBU) have models focused entirely on data centres. DCRU operations are based in the US while AJBU is in Asia.

Table 1: Largest REITs by Market Cap and REITs with Data Centre Exposure

Other S-REITs have some degree of exposure to data centre properties and a collection of these is outlined above. That said, data centre REITs command higher dividend yields relative to other REITs. Among data centre REITs, DCRU has the highest yield at 7.5% and was the best performer in 2023. 

DCRU and AJBU have also seen small drawdowns YTD in 2024 compared to some of the largest REITs. However, based on 12-month analyst price targets, DCRU is poised to be one of the strongest performers over the next year.

To read more about DCRU and Singapore REITs market, please click here to read the research note in full on Smartkarma.

For more insights on macro developments and its impact on various asset classes including Singapore listed assets, follow Mint Finance.

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