Matthew Norris, investment adviser to the VT Gravis Digital Infrastructure income fund, highlights where and why he is seeing strong investment opportunities from the reshaping of the way we live, work and play in today’s new world.
Designed to invest in companies which own the physical infrastructure assets vital to the digital economy, the VT Gravis Digital Infrastructure Income Fund marked its third anniversary on 31 May 2024.
The fund returned 0.35% over the three years since launch, making it the 7th best performing fund in the 50+-strong Investment Association Property Other sector1. During that time, the fund has also produced a reliable and growing income: the current trailing 12-month dividend yield is 3.0% and has grown 20.5% since June 20222.
Here, investment adviser to the fund, Matthew Norris, gives five reasons why he believes digital infrastructure is the future of property investing.
Over the past decade, the commercial property sector has undergone quite a transformation. Technological innovation has moved at an extraordinary pace, reshaping the way we work, live and play. As it has done so, the infrastructure needed to support it has also changed and this digital infrastructure is now as critical as our transport network.
For example, the moves to more flexible and remote working, and environmental considerations have changed the way businesses think about office space, and increased the need for cloud computing, high-speed internet, and advanced communication technologies.
We’ve also witnessed the decline of traditional high street retail outlets, as they have struggled to keep pace with e-commerce growth and changing consumer behaviour. Increasingly, urban logistics and e-commerce fulfilment centres have also had the knock-on effect of facilitating real-time tracking of shipments, inventory management, and order fulfilment, which improves the overall efficiency of the e-commerce supply chain.
Recreation has also undergone some major changes. The way we watch TV, listen to music and play computer games have all been revolutionised in the past few years making telecoms towers and 5G networks crucial to our enjoyment. Because in the minute it has taken you to read the first few lines of this article, there will have been 2.4 million Google searches, 213 million emails sent, 16 million texts received, and 694,000 hours of YouTube videos streamed3. The fourth industrial revolution has arrived, and it is taking place quickly.
Why invest today?
The direction of travel and the long-term case for digital infrastructure is undeniable, but what about the short-term? To me, there are five reasons why investing in the sector today seems the obvious choice.
1. Demand is outstripping supply
While traditional property areas such as offices and retail are struggling, demand for digital infrastructure such as data centres, network cabling and communications towers is currently outstripping supply. We simply can’t build digital networks fast enough and this is set to continue. In the next hive years, consumers and businesses will generate twice as much data as all the data created over the past 10 years.4 Average global mobile data consumption per smartphone alone is expected to reach 56 GB per month at the end of 2029.5
However, with power requirements for the likes of data centres also growing exponentially, supply of new infrastructure is being hampered by regional power limitations. This means incumbent data centre owners and operators are reaping the benefits of limited competition. One such example is Digital Core REIT, a leading pure-play data centre Singapore-listed REIT, sponsored by Digital Realty, the largest global wholesale data centre owner and operator. Obtaining planning permission and power in Singapore is particularly challenging, creating a substantial economic moat for existing data centres.
2. Reliable long term rent generators
With demand outstripping supply, landlords of digital infrastructure assets – which tend to be REITs such as the one named above, or real estate operating companies are currently able to secure reliable long-term leases. Many of these leases also include contractual rent escalators, lending a degree of dependability and predictability to the future income streams, as well as inflation protection.
What’s more, many of these assets benefit from high tenant retention rates. No longer are logistics spaces simply used for storage. They are a part of a complex supply chain solution, marked by increasing rates of automation and specialist fits. Tenants tend to be sticky because there is a meaningful amount of money involved in moving from one location to another.
3. Fresh assets with little obsolescence risk
Digital infrastructure is also new infrastructure – the assets are young and purpose-built by experts who understand exactly what is required both today and in the future. This means a key risk when considering traditional real estate – obsolescence risk – is avoided.
The biggest threat facing humankind is clearly climate change and buildings have a large carbon footprint. Different countries are dealing with this in different ways – whether through an increase in certification or by setting regulation. Older buildings that become too expensive to update could become stranded assets.
4. Little political/regulatory risk
Another key consideration for investors is political and regulatory risk – and never more so arguably than this year. 2024 is one of the biggest election years in history, with around half of the world’s population going to the polls in more than 40 different countries6 including, of course, here in the UK.
However, regardless of political orientation, our view is that governments and regulators around the globe recognise the critical nature of digital infrastructure assets in securing their own future prosperity and are unlikely to intervene.
5. Private equity loves digital infrastructure
My final reason not to delay investment in digital infrastructure is that retail investors are currently missing out, while professional investors are reaping the rewards.
We’ve seen large institutions, particularly private equity heavyweights, repositioning their real estate portfolios away from traditional real estate sectors and into digital infrastructure via the large portfolios of assets held by REITs. This has acted as an insurance on the downside, whilst offering some sweetness on the upside.
Since launch three years ago, no fewer than eight companies held in the Fund have been taken over by private equity buyers seeking future rent reversion and making the most of the discounts on offer in the listed markets. I expect this to continue.
Find out more about Gravis here
About Matthew Norris
Matthew is responsible for the oversight of the VT Gravis UK Listed Property Fund and the VT Gravis Digital Infrastructure Income Fund.
Matthew has more than two decades investment management experience and has a specialist focus on real estate securities. He served as an Executive Director of Grosvenor Europe where he was responsible for global real estate securities strategies. He joined Grosvenor following roles managing equity funds at Fulcrum Asset Management and Buttonwood Capital Partners. He also provides expert input to research projects run by EPRA, which focus on the importance of emergent real estate sectors.
Matthew graduated with a degree in Economics & Politics from the University of York. He is a CFA charterholder and holds the Investment Management Certificate.
Find out more about Gravis here
- Source: FE fundinfo, total returns in GBP, 31 May 2021 to 31 May 2024 ↩︎
- C Income share class. Trailing 12-month dividends 28 March 2024 compared to 30 June 2022. ↩︎
- Source: wyzowl.com, internetlivestats.com, mackeeper. com, sellcell.com ↩︎
- Source: IDC #US49346223, Revelations in the Global Storage Sphere 2023, John Rydnin, Aug 2023, jll-datacenter-outlook-global-2024.pdf ↩︎
- Source: Ericsson Mobility Report November 2023 ↩︎
- Source: More than 4 billion people are eligible to vote in an election in 2024. Is this democracy’s biggest test? (theconversation.com) ↩︎
