AI Data Centers Are Booming! What Advantage for REITs and Hyperscalers?

$Realty Income(O)$ $CapLand IntCom T(C38U.SI)$ $Mapletree Ind Tr(ME8U.SI)$ $Frasers Cpt Tr(J69U.SI)$ $Equinix(EQIX)$ $Digital Realty Trust Inc(DLR)$ $American Tower(AMT)$

Introduction

Hello, investors! Today, we’re diving into the data center industry, which has been generating a lot of buzz lately. However, I won’t be discussing Keppel DC REIT’s recent $1 billion acquisition of two data centers from its parent, I won’t be adding to the conversation. Instead, I’d like to take a step back and focus on the broader data center landscape in the U.S., a topic that’s been gaining traction, especially after Donald Trump’s win in the 2024 U.S. presidential election. Specifically, we’ll explore how these developments might impact two Singapore-based REITs many of us are watching: Mapletree Industrial Trust (MIT) and Digital Core REIT. Plus, we’ll take a look at some U.S.-listed investments that could directly benefit from these trends.

Before we get started, a quick reminder: this article is for informational and educational purposes only. Everything I share here is based on publicly available information and my personal analysis. Always consult with a licensed financial adviser before making any investment decisions. And while I may hold positions in some of the REITs discussed, this doesn’t mean I’m endorsing them for you. Now, let’s dive into how these developments could play out and what it means for us as investors seeking to ride the data center wave!

What Trump’s Presidency Means for U.S. Data Centers

Let’s take a deeper look at why Trump’s presidency could have a big impact on the data center industry. Beyond the potential pro-business and deregulation policies typically associated with his administration, one key factor is the rise of AI, which is expected to receive a significant boost under Trump’s leadership. Here’s how these elements might come together to benefit U.S. data centers.

First, let’s talk about the demand driven by AI. The growth of artificial intelligence, especially in large-scale applications like autonomous vehicles, large language models, and machine learning, requires an immense amount of computing power. This, in turn, leads to a surge in demand for data centers and upgrades to existing facilities. Think of data centers as the backbone supporting all of these AI advancements.

Second, there’s the potential for a national push to strengthen U.S. competitiveness in AI. There have been discussions around a “Manhattan Project for AI,” a large-scale government initiative to accelerate AI development. If this goes through, it would require vast data processing and storage capabilities, placing data centers at the core of this initiative.

Another factor is Trump’s stance on energy production. His pro-energy policies, whether promoting fossil fuels or nuclear energy, could align well with the energy-intensive nature of data centers. Given that AI applications consume large amounts of electricity, an increase in energy availability could be a major benefit for the data center industry.

Finally, deregulation could play a key role. Data centers often face significant barriers in zoning, environmental approvals, and expansion plans. If Trump’s administration pushes for deregulation, it could speed up the development of new data centers.

In short, Trump’s presidency could have a major impact on the data center landscape through AI-driven growth, deregulation, and energy policies. This is definitely something to keep an eye on if you're invested in REITs or stocks with exposure to data centers.

How Trump’s Administration Could Boost Data Center REITs

Trump’s return to office could act as a catalyst for the data center industry, presenting significant opportunities for data center-focused REITs like Digital Core REIT and Mapletree Industrial Trust (MIT), both of which are well-positioned to benefit from the growing demand for data storage and processing.

Let’s start with MIT. Known for its diversified portfolio, MIT includes industrial properties, business parks, and a growing allocation to data centers. Today, about 55% of its assets are in data centers, located primarily in North America and Singapore. MIT is supported by Mapletree Investments, a well-known and reliable sponsor that provides strong backing and a pipeline for future growth.

DLR

Digital Core REIT, on the other hand, is a pure-play data center REIT with a portfolio focused entirely on North America. Its properties are strategically located in key markets like Northern Virginia and Los Angeles—two global hubs for data center activity. Digital Core REIT also benefits from its sponsor, Digital Realty, one of the largest owners and operators of data centers globally, giving it access to a solid pipeline of acquisition opportunities.

For investors looking for direct exposure to the booming data center sector, Digital Core REIT might be the better option. Its focus on data centers means that its performance is tightly linked to the growth of AI, cloud computing, and data-driven technologies. If you're bullish on data centers and want to go “all in,” Digital Core REIT could be worth considering.

For those who prefer a more diversified portfolio, Mapletree Industrial Trust offers an appealing option. While data centers form a significant portion of its assets, MIT also holds exposure to other resilient sectors like Singaporean industrial properties and business parks. This diversification provides more stability and reduces reliance on any one segment. Additionally, its well-established sponsor, Mapletree Investments, brings a track record of successful REIT management in Singapore.

U.S. Listed Exposures for Investors

If you're seeking direct exposure to the data center industry but want to look beyond Singapore REITs, the U.S. market offers alternatives in the form of hyperscalers and U.S.-listed data center REITs. Each comes with its own set of benefits and considerations.

Hyperscalers

Hyperscalers are the giants of the tech world, including Amazon (via AWS), Microsoft (via Azure), and Google (via Google Cloud). These companies own and operate massive data centers to support their cloud services, making them central players in the data center ecosystem.

Investing in hyperscalers offers exposure to broader tech growth beyond just data centers. These companies are leaders in AI, cloud computing, and other digital services, which can drive substantial long-term capital gains. However, a key downside is that data centers make up only a portion of their business, so they’re not pure plays on the data center market. For example, AWS is just one part of Amazon’s broader empire.

Another factor is that hyperscalers focus on reinvesting profits into growth, meaning they generally offer little to no dividend income. This makes them less suitable for income-focused investors. Additionally, their share prices can be more volatile, reflecting broader tech sector trends.

U.S.-Listed Data Center REITs

EQIX

For income-focused investors, U.S.-listed data center REITs like Equinix and Digital Realty Trust (which is the parent of Digital Core REIT) provide another route. These REITs specialize in owning and operating data center properties, generating rental income from cloud providers, enterprises, and IT services.

The key benefit here is that data center REITs offer more direct exposure to the data center growth story, providing steady dividends and real estate-backed assets. They also offer a way to invest in the infrastructure that supports hyperscalers, as these REITs lease significant portions of their properties to them.

However, a downside is that U.S.-listed REITs are subject to a 30% withholding tax on dividends for Singapore-based retail investors, which can reduce overall yield. But for investors focused on capital appreciation, this may not be as significant. For instance, over the past decade, Equinix’s share price has surged by more than 300%, with Digital Realty Trust following a similar upward trend.

Comparing Hyperscalers and Data Center REITs

Let’s quickly compare the two options:

Growth vs. Income: Hyperscalers are more growth-focused, with the potential for substantial capital appreciation. U.S.-listed data center REITs offer a mix of income and growth, catering to investors who value regular dividends.

Sector Exposure: Hyperscalers provide exposure to the broader tech ecosystem, including AI, cloud, and software services. Data center REITs focus solely on real estate infrastructure, which can be less volatile but also more niche.

Risk Profile: Hyperscalers are typically more volatile, reflecting the broader tech sector. Data center REITs tend to be less volatile due to their real estate backing.

The Investment Opportunity

MIT’s diversified exposure to data centers and industrial properties aligns with my long-term goal of balancing growth and stability. On the other hand, Digital Core REIT offers me more targeted exposure to the U.S. data center market, which I believe will benefit from the pro-AI policies under Trump’s administration.

Looking ahead, I may invest in Digital Core REIT, but only if prices correct further along with the rest of the REITs. I’m keeping an eye out for better entry points, as I see potential buying opportunities as market conditions improve.

For now, I’m steering clear of U.S.-listed data center REITs and focusing instead on the hyperscalers, which own extensive data center networks as part of their broader businesses. While hyperscalers don’t provide pure data center exposure like REITs, many of them complement their data center operations with highly profitable business segments. Amazon’s AWS, for example, is a market leader in cloud computing and heavily relies on data centers. As demand for cloud services grows, so will the utilization of Amazon’s data center assets.

By investing in hyperscalers like Amazon and Microsoft, I’m not only gaining exposure to the data center sector but also benefiting from their diversified revenue streams and innovative growth strategies.

Conclusion

The data center industry is evolving rapidly, and with Trump’s pro-business administration, even more growth opportunities could be on the horizon. Whether you prefer a focused play like Digital Core REIT, a diversified approach with Mapletree Industrial Trust, or the broader tech exposure offered by hyperscalers, there are options for different investment strategies.

As always, please consult with a licensed financial adviser for advice tailored to your financial situation. Let me know your thoughts in the comments below—how do you view the data center trend, and do you see it as a key part of your portfolio?

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