Merlin turns the 'data center' into the "star" real estate asset due to its high profitability

"Pretty they are not. They have to be robust." This is how he valued this Wednesday CEO of Merlin Properties, Ismael Clemente, the business in which the real estate company has focused, data centers. He did so during the company's annual meeting of shareholders, in which he renewed his position as CEO of the company. An position that was on the tightrope just a few months ago.

"It is a category in which we have been working for almost three years before launching," he acknowledged during his speech. "It is a clearly booming market, where there is a shortage of product and there is also a temporary catalyst, which is the 'timing' of entry, because a significant number of submarine cables are arriving on the Peninsula. When this occurs, the traffic of data," Clemente concluded.

For the listed real estate investment company (Socimi), the 'data center' is becoming "the star asset", explains Enrique Fonseca, one of those responsible for its data center business, to They are because "there is a lot of investor interest, especially institutional, because the returns they generate are very attractive, they are double digits; and they are very long-term projects, with tenants who are of the best solvency, who provide a lot of security."

Until now, especially before the pandemic, these funds and investment firms focused on assets such as offices, mainly those located on key axes in large cities. Now the priority turns to getting very long-term tenants in businesses that, a priori, are not going to go down.

In the case of Merlin, these data centers are at an early stage. The listed company focused on rentals has four developments underway: in Bilbao-Arasur, Barcelona-PLZF, Madrid-Getafe and Lisbon-VFX. To date, it only has a license for the first of them, which is expected to be built in 2023, and it hopes to have the other three construction licenses before the end of this year.

Behind this change in priorities in a sector such as brick investment is that lease contracts are sought where the underlying, the business behind the real estate contract, is no longer so much in analog activity, but digital. And this can be a logistics business linked to electronic commerce or data centers of a 100% digital technology. "There the big companies can be counted on the fingers of one hand," says Francisco Porras, also responsible for Merlin's 'data center' business.

There aren't that many names - basically tech multinationals - but Merlin isn't talking about potential clients. It does indicate that these are companies where the 'data center' is the base of the pyramid that supports their entire business, whether they are companies that work with the public 'cloud' or focused on social networks. They do have a client for their project in Bilbao, which they do not reveal, the first to start, which could be extended to Madrid and Barcelona. A contract that will have a duration of 45 years.

As proof of this turn of business and this change of priorities, the directors mention the sale to BBVA of a portfolio of more than 600 branches of the financial institution, who remained in them for rent. An operation valued at 1,987 million euros, according to what Merlin indicated to the National Securities Market Commission (CNMV).

Merlin acknowledges that the data center business in Spain is very incipient when compared to other countries. In its domestic market, it has not yet reached centers totaling 86 MW, when the average in European capitals is 2,000 MW. We're running late.

The objective pursued by the Socimi, as detailed at its shareholders' meeting, is to first develop the four aforementioned 'data centers' that will reach 70 MW in five years. That will mean, he points out, an investment of 596 million euros and annual gross net income of 75.2 million.

That is the initial plan, but the company assumes that it can accelerate and reach investments that allow it to reach 200 MW. At the moment, this second goal is not on the table, although the door is open to search and find more land for new data center developments.

energy and water consumption

The asterisk on this quest is that not just any terrain is worth it. Those responsible for Merlin indicate that, both in this business and in logistics, the Socimi owns the land and these, in the case of data centers, must be viable from the point of view of energy supply, access to the telecommunications network, proximity to population centers and a safe seismicity morphology.

This is where other supply requirements also come in, such as the fact that the electricity in these centers must be of renewable origin. "This is an electro-intensive sector, although today it is not considered that way," explain the company's directors. "We need the energy to be green, renewable," he assumes; because given the high energy use of these facilities, the listed company would not achieve the decarbonization objectives, of zero CO2 emissions in 2050, which Brussels has set. "The agreements with the energy companies go in parallel. We are in negotiations with various suppliers," they delimit on the electrical issue.

The other major consumption is water. The Socimi assumes that data centers consume high water resources. However, his case is different because, he says, they do not consume water but glycol, a chemical used for cooling. The technology does not belong to the Socimi, but to Endeavor, its American partner in this activity, where the listed real estate company provides the land and the investment and the North American company the management and technological model.

Those responsible for the real estate 'data center' recognize that this is a new market segment where making forecasts for the future is not easy. Its asset, the directors analyze, is in the geographical position of Spain, with respect to the whole of the European Union, America and Africa.

“On the one hand, the European Union has launched the data sovereignty project. On the other hand, the location of the Iberian Peninsula is strategic, because we are at the same latitude as New York and, from Lisbon, there is less distance to Fortaleza [Brasil] than the one from Miami”, argues Francisco Porras. "And we are the link with Africa," he adds.

Precisely, Ismael Clemente broke down the potential of these cables at the meeting. He pointed to Marea as an already operational axis, since 2017, which links the United States with Europe (via Bilbao) and is promoted by Meta (Facebook) and Microsoft. For this year, he indicated, the Grace Hopper is planned, which also links the North American country with the EU through Euskadi, and promoted by Google; and the EllaLink, which arrives in Lisbon from Fortaleza, financed by the investment firm Marguerite.

Two other pending submarine cables remain. By 2023, 2Africa is planned to surround the entire continent and reach the Portuguese capital, which is being developed by China Telecom, according to Clemente; and the Meduse, which will link Israel with Barcelona and Lisbon, owned by the telecommunications operator AFR-IX. And, if there are cables, there have to be data centers to operate them. "Going forward, they are going to be key to our revenue," Merlin's CEO concluded.

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