Demand for data centers

At the end of 2022, there were about 140 facilities in Poland designed as digital data processing centers. The largest concentration of such facilities is of course in Warsaw, where the total supply is estimated at 130 MW (megawatts). The Polish market is dominated by domestic companies such as Beyond, Talex or Polcom, but the world's largest players such as Equinix are also present on it.

There is a huge gap between FLAPD markets and the rest of European capitals. Frankfurt, London, Amsterdam, Paris and Dublin dominated Europe in terms of data centers. Warsaw maintains a strong position with power comparable to other capitals and seems to be a leader in Central and Eastern Europe. Rising construction costs, prices and availability of land lead to the search for new locations for data center facilities outside the FLAPD market. Digital transformation is driving the development of this sector around the world.

Depending on the sources, it is expected that in 2025 the amount of data generated (i.e. created, intercepted, copied and used data/information) in the world will reach the level of approximately 175 zettabytes[1] although there are analyzes that say it exceeds 180 zettabytes. The development of e-commerce, digitization of business, the development of technologies such as IoT, machine learning, artificial intelligence generate the demand for data storage and analysis, which translates directly into the demand for data centers, cloud and colocation services.

The digitization of business in Poland is progressing, but there is still a lot of room for technological transformation in this area. In the era of Big Data, data processing has a key impact on the process of creating added value for enterprises. Growing computing power and the development of machine learning methods used for automatized analytics only make this big data technology more accessible and drives the necessity of business digital transformation.

As in any other segment of the real estate market, location is also crucial in the case of data centers. The data center requires access to reliable power and broadband Internet access. Power supply and Internet access are the basic parameters in terms of access to infrastructure in a given location.

One of the key factors in digital services is availability and reliability. We are used to the fact that information is available at hand with a single click. The truth is that even when using high-end optical fiber, the data transfer speed decreases by about 0.82 milliseconds for every 100 miles. In addition, one of the redundancy best practices is to copy data to another location far enough away to reduce the risk of a natural disaster affecting both locations, and close enough to deal with latency issues in the data transfer. Therefore, instead of a silo and centralized network, a geographically dispersed digital infrastructure is preferred, based on a hybrid model that uses data center, collocation and cloud technology.

The largest number of data center facilities is concentrated in the cities of Frankfurt, London, Amsterdam, Paris and Dublin. The next, lower level in terms of the concentration of such facilities are the other European capitals, in particular Berlin, Reykjavik, Oslo, Zurich, Milan, Vienna, Warsaw and Prague. Naturally, most of the supply is concentrated in capital cities, which results from the need for efficient access to infrastructure (power supply and broadband Internet) and the availability of qualified specialists necessary to operate data centers.

According to the GLOBAL DATA CENTER INVESTMENT OUTLOOK 2022 study (DLA PIPER), according to the respondents, the Data Center real estate segment in Poland is undervalued. Measuring the expected rates of return on the Polish market is difficult due to the low transactional activity compared to other sectors of commercial real estate. In developed markets, it is clear that returns on investments in broadly defined data center facilities are on average at least 1pp higher compared to other sectors¹.

In the context of the implementation of the zero-emission CO2 policy, the question arises of how to reconcile environmental goals when investing or building a Data Center facility. Huge energy consumption combined with the need to constantly cool servers means that, for example, Hyperscale facilities leave a significant carbon footprint. However, it is worth looking at it from a broader perspective. Moving digital resources to colocation or the cloud allows you to reduce your company's operating costs by reducing energy consumption. Also, an intelligent approach to the use of IT infrastructure can reduce the required amount of resources, and thus energy. At the same time, Hyperscale facilities can be powered by purchasing green energy. Undoubtedly, an important aspect of the development of data center services in Poland will be the diversification of energy sources through the development of RES and nuclear energy. This would increase users' access to clean energy, and would also help bolster energy price stability, which is a key component of any data center business plan. For example, the average energy cost of a facility in Hyperscale is up to 40% of its revenue.

Taxes

From the tax point of view, investing in data centers may seem - to some extent - quite similar to investing in other, more standard types of the real estate asset classes (such as warehouse, office or retail). However, it also has certain specific, distinct tax features that are definitely worth having a closer look.

For example, in case of the standard property companies investing e.g.in offices or logistics centers it is a relatively obvious assumption that these companies derive most of their value from the real estate assets located in Poland (i.e. from the land, building(s) and structures). This - in turn - means i.a. that the sale of shares in such entities may be subject to capital gains taxation in Poland (unless this taxation is effectively mitigated based on the respective double tax treaties). At the same time, it needs to be noted that since the data centers are highly advanced in terms of the technologies and systems involved, the composition of key assets of a data center company may be different than in the case of a standard property company. As a result, in some cases, sale of the shares in such a company by a foreign holding platform may not trigger capital gains taxation in Poland after all. What is more, such a company may not be subject to the annual group structure reporting obligations or may not be exposed to certain limitations affecting the deductibility of the depreciation write-offs (while - at the same time - these obligations and restrictions would apply to standard real estate companies). However, this requires a detailed, case-by-case analysis.

Another interesting aspect of the data center investment (having a direct impact on the tax side of things) is the very nature of the agreement concluded with the ultimate customer. For example, one of the key conditions for being liable to a so-called “minimum CIT on buildings” is that the building held by a taxpayer should be subject to lease or a similar agreement. While this condition is typically expected to be met by standard real estate companies, it may not always be the case for the data center companies. As such, it is always worth checking the nature of the agreement concluded with a customer since it may affect certain tax areas (and - if needed - confirm the tax implications with a binding tax ruling).

As a side note, data center companies may typically incur significant expenditures connected with getting the required electricity connection (with due regards to their significant power demand). As such, from the tax point of view it is worth verifying whether in a given case the costs of this connection should be capitalized to the initial value of the data center (and be tax deductible via depreciation write-offs) or whether they should be tax deductible when incurred (on a one-off basis). This may have a huge impact on the effective taxation of the investment - especially in the initial years.

¹ Of course, ultimately, investment decisions should be made after conducting an in-depth business analysis. Rates of return on individual assets, including real estate, may differ. The information presented is for illustrative purposes only and cannot be used as an element of investment advice.