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Beyond Brexit: Can the hyperscalers future-proof the growth of the UK colocation market?

Demand for colocation datacentre space in London is booming, on the back of the hyperscale cloud giants setting up shop in the UK, but will it be enough to safeguard the sector’s growth in the face of Brexit?

The take-up rate of colocation space in London is currently at record levels, according to real-estate consultancy CBRE and its quarterly analysis of how this part of the datacentre industry is faring.

Speaking to Computer Weekly ahead of the release of its full-year analysis of the London colocation market, Mitul Patel, CBRE’s associate director of datacentre solutions, said the firm’s data suggests 2017 is on course to become another record-breaker for the capital in take-up terms.

“For the full-year, 2016 was the strongest year for take-up in London [on record], and 2017 – when our final numbers are published – will have beaten 2016,” he said.

Much of the demand for datacentre space is coming from the hyperscale cloud giants, who view colocation as a fast-track approach to building out their presence in the UK and other European territories, said Patel.

“Last year they made up 70% of the colocation market, and this year they will probably be fairly similar,” he said.

The hyperscale community’s appetite for colocation has proved something of a blessing for operators, given that some were struggling to fill the space they had a few years ago, said Amy Daniell, director of mission critical at infrastructure consultancy AECOM.

Speaking at the inaugural Datacloud UK event in late January 2018, she said a “glut” of building activity over a few years had generated an “awful amount of whitespace” that is now being steadily filled by the hyperscale community.

“There is more demand coming into the UK,” she said. “Major cloud providers realise it is expensive to build over here, so they are sticking with going down the colocation route.”

Quarter-on-quarter CBRE reports charting the growth of the London colocation market bear this out. Also, compared to the other three markets tracked by the firm – Frankfurt, Amsterdam and Paris – London has between 30-50MW of spare supply left.

Combined with the emergence and expansion of the regional datacentre hubs in some of the UK’s other major cities, there should be no shortage of existing space for the hyperscalers to expand into for the foreseeable future.

“We are seeing [the hyperscalers] moving outside of the M4 corridor and being a bit more flexible with the areas where they can take space in,” said Daniell.  

Latency concerns have previously put some clients off building out their presence outside the capital, where fibre network connections abound, but this is now less of an issue, fuelling the growth of colocation hubs in Birmingham, Cardiff, Manchester, Scotland and Belfast, she said. “That cluster around London is going to spread out a bit and around the UK.”

The organisation Daniell works for, AECOM, has also seen a marked uptick in demand for new datacentre builds in the UK recently, which should also lead to a fresh supply of colocation space coming online in due course.

“We’ve seen big schemes in Dagenham, Slough has had a big resurgence again, and north of the M25 with Kao Data,” she said. “We’ve done a lot of work in Europe and the Middle East in the last three to four years, and now the UK is sort of coming back on our map.”

Breaking down Brexit

Although the colocation market may be booming now, concerns continue about how the fallout from Brexit will affect the sector.

Almost as soon as the results of the EU referendum were confirmed in June 2016, there was speculation that some European companies may choose to greet the news by relocating their UK headquarters and take their datacentre requirements with them.

At present, there is no sign of any Brexit-induced departures from the London colocation market, said Patel, nor does he expect there to be.

“If you look at the wider business, economical and political landscape, no sector has seen a massive wave of organisations leave the UK and, even if they do, I don’t think they’ll move their IT straight away,” he said. “It won’t be a knee-jerk reaction.

“We [CBRE] think certain European agencies will probably move out of London, but then we think other people might move into London because they’re serving the UK market from other destinations in Europe. In the end, I think it will balance itself out.”

Participants in a Brexit-focused Datacloud UK panel reached a similar conclusion, agreeing that Brexit will most likely result in a “reshaping” of the datacentre market as we know it today, rather than contribute to its wholesale destruction. 

Jack Bedell-Pearce, managing director of UK-based colocation provider 4D Data Centres, told attendees that the UK datacentre sector is in a strong position that should help it weather whatever challenges the Brexit negotiations throw its way.

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“There is a huge amount of momentum behind the datacentre and cloud sector in the UK,” he said. “Central London isn’t going to disappear. Too many people live and work here, and London is still going to remain the financial services capital of Europe.

“There are going to be opportunities, potentially, not to reinvent ourselves, but to give us a more competitive edge.”

For example, Brexit could pave the way for a new points-based immigration system to be introduced, which could make it easier in the long run for datacentre operators to source the skills they need.

“There can be some positive things that can come out of Brexit, but we have to keep on shouting about them,” said Bedell-Pearce.

Another area where assurances are still being sought from the likes of TechUK concerns how leaving the EU will affect the free flow of data between the UK and the continent.

Mike Conradi, a partner at technology-focused law firm DLA Piper, told attendees that a couple of emerging issues are preventing clarity on data flows being achieved at present.

“If we want to move data from one country to another to be processed by another, you can’t transfer data outside of the EU unless your country is deemed to have adequate data protection laws,” he said. “Obviously the hope is that the UK will be deemed to have adequate data protection laws, but unfortunately it’s not completely clear that we would.”

The most pressing matter to address is the reaction of the European courts to prime minister Theresa May’s Investigatory Power Bill.

“The European courts have said it is not compliant [legislation] and it is not in the bag that we will be deemed to be compliant,” said Conradi. “Although it could introduce some more difficulties, they will not be insurmountable.”

Caution over colocation

Given just how big a hold the hyperscalers have on the colocation market, Patel said any change in their buying patterns is likely to have a bigger impact than Brexit, particularly if they start to adopt a buy-and-build approach to building datacentres in the UK.

“That will have a bigger impact because the hyperscalers are still the predominant driver of market growth at the moment,” he said.

Ireland’s burgeoning datacentre economy is being fuelled by hyperscalers, such as Apple, Facebook and Amazon, opting to build their own sites rather than lease colocation space from others.

The high cost of land and the scarcity of suitable sites are generally considered to be the main reasons why the hyperscalers have so far not employed similar expansion tactics in the UK. But that could change. 

In some European countries, the hyperscalers are effectively gifted land on which to build their datacentres, as governments believe their presence could lead to follow-on investment and benefit the local economy in other ways.

“If you’re looking at some of the markets that are moving quickly, they’re giving away land free of charge to big cloud operators to come and build a presence in their countries, but we’re not doing that in the UK,” said Daniell.

“Land is very important to us and expensive, but there has to be a shift towards pushing our developers to be more agreeable and provide better terms to get these major providers into the country, which is why they’re going to colocation [at present].”

Against this backdrop, the fact some hyperscale firms are taking out relatively short three-year leases should be a point of concern for the colocation community, said Steve Wallage, managing director of datacentre-focused analyst house Broadgroup Consulting.

“Many of the details remain confidential, but from what we’ve seen, some of the cloud companies have signed [colocation] deals for as little as three years,” he told the Datacloud UK attendees during the opening address.

While some members of the colocation community seem largely untroubled by this development, Wallage said it is a situation that could leave their investors anxious.

“When you speak to the colocation company, they’ll say: ‘Hey, that’s just a terms-and-conditions issue. Not only will they stay at the end of those three years, but they will expand. They’re a cloud company – they need to expand’,” he said. “But contractually, they have no commitment beyond three years. And if you’re an investor, that is something that is going to concern you.”

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