Data center

This paper aims to analyse the appraisal of a specialised form of real estate - data centres - that has a unique blend of locational, physical and technological characteristics that differentiate it from conventional real estate assets. Market immaturity, limited trading and a lack of pricing signals enhance levels of appraisal uncertainty and disagreement relative to conventional real estate assets. Given the problems of applying standard discounted cash flow, an approach to appraisal is proposed that uses pricing signals from traded cash flows that are similar to the cash flows generated from data centres. Based on the law of one price, it is assumed that two assets that are expected to generate identical cash flows in the future must have thesame value now. It is suggested that the expected cash flow of assets should be analysed over the life cycleof the building. Corporate bond yields are used to provide a proxy for the appropriate discount rates for lease income. Since liabilities are quite diverse, a number of proxies are suggested as discount and capitalisation rates including indexed-linked, fixed interest and zero-coupon bonds. The application of conventional discounted cash flow approaches to the appraisal of data centres requires information about a wide range ofinputs that is difficult to derive from market signals or estimate analytically. In practice, discounted cash flowappraisals of data centre facilities are forced to incorporate non-market assumptions that are inevitably subjective. Cash flows from data centres tend to be more complicated because of the high levels of current and capital expenditure compared with conventional assets. This requires an understanding of the appraisal ofliabilities as well as income. Whilst the use of price information from similar cash flows such as corporate bonds is helpful, there are rarely assets and liabilities that have identical cash flows and risks and some approximation is necessary. The digitalisation of