VIDEO: Concrete & Cables - The Foundations Of Our Digital Future

13 minute read

Matthew Norris

Director, Real Estate Securities

Matt Norris, Director of Real Estate Securities and Fund Manager at Gravis, sits down with Julian Marr, Editorial Director at Portfolio Adviser, to provide a deep dive into the investment opportunity presented by the VT Gravis Digital Infrastructure Income Fund.

Video interview

The pair discuss the unique characteristics of digital infrastructure assets; their tangible nature, high cash flow visibility, and contractual rental income, and how these assets offer growth income, with, for example, approximately 70% of the portfolio including fixed uplifts or inflation–linked escalators in their contracts.

Matt also highlights the Fund's focus on investing in companies which own the physical assets, data centres, telecoms towers, logistics warehouses supporting e-commerce, and networks, benefiting from the fourth industrial revolution.

See below for a summary of the questions covered in the video:

Why invest in digital infrastructure?

At Gravis, we recognise a great investment prospect in digital infrastructure. As we progress through the Fourth Industrial Revolution, characterised by ground-breaking technologies such as big data and artificial intelligence that has transformed our lives, the nature of work and leisure is evolving. This revolutionisation requires new infrastructure, such as data centres to support online communication and viewing, communication towers and 5G networks to enable mobile streaming, and e-commerce fulfilment centres to facilitate online shopping. These developments represent a fresh investment possibility, as digital infrastructure is a key foundation of the Fourth Industrial Revolution.


What are the key characteristics of a digital infrastructure asset?

Digital infrastructure is distinct and different from software and hardware companies. Digital infrastructure is tangible – you can see it; you can touch it. At Gravis, we invest in listed companies that own physical infrastructure assets such as data centres, communication towers, and e-commerce fulfilment centres. As infrastructure and property investors, we are particularly attracted to those assets due to their contractual rental income, which provides high cash flow predictability and visibility. In contrast, software companies, hardware companies, and payment systems typically have transactional revenue models that are more difficult to predict and can be more volatile. At Gravis, we love the income visibility you get from owning the physical assets themselves.


On the income side, what sort of yields can an investor expect from this sector?

This is growth income, not fixed income. When it comes to yield, there’s a range of options available, depending on the rate of business growth. However, in the digital infrastructure realm, the average dividend yield is typically around three to four percent, with medium to high single-digit growth. This income is not from fixed income, but from the lease’s contractual rental income, which typically has annual escalators.


On the growth side, what sort of trends have you observed there?

Regarding growth trends, the Fourth Industrial Revolution is fuelling significant growth in data consumption. Societies are generating and storing vast amounts of data, with the amount of data captured, copied, and stored exceeding one hundred zettabytes. This trend shows no signs of slowing down. The second big trend is e-commerce penetration. In the UK, online spending accounts for 25% of all expenditures, which requires the development of e-commerce fulfilment centres. Looking at the commercial world, it is estimated that the growth on tech is going to grow eight times more than the economy itself. The massive investment that corporations are making in their digital infrastructure should benefit the owners of the digital infrastructure.


Private equity, as in their way have noticed there is something going on in this sector. Why is it specifically so active in acquiring digital infrastructure assets?

It is fair to say that private equity loves public equity, and especially digital infrastructure. Private equity loves cash flow, especially that predictable nature of cash flow. Blackstone, which owns the world’s largest real estate assets, has been acquiring digital infrastructure funds. Data proliferation is one of their strongest and highest conviction areas. Similarly, sovereign wealth funds also love the steady cash flow that comes with owning digital infrastructure assets.


What differentiates it from other typical global property funds?

The focus of the VT Gravis Digital Infrastructure Income Fund lies in four key sectors of next-generation infrastructure and real estate. Our primary investment areas are communication towers, which are often regarded as the most profitable businesses due to their longevity and minimal maintenance capex. Another key sector is logistics, which includes e-commerce fulfilment centres utilised by major companies such as Amazon and Ocado. These facilities feature advanced robotics technologies that significantly increases their value beyond just the physical building. The tenants in this sector have a strong commitment to their leases, often lasting 20 years or more, providing steady rental income for the fund. Additionally, our focus includes data centres, which are vital in processing the vast amounts of data generated by modern technologies. Lastly, we invest in fibre optic networks, which offer seamless connectivity and distinct advantages over traditional global property funds that often include industries like retail. We do not invest in regional offices, as we prioritise the next generation of infrastructure and property for our investors.


How does the fund perform versus other global property funds?

Since the inception of the fund, it has outperformed global real estate. This is due to the yield combined with a slightly faster rate of rental growth, resulting in mid-to-high single digit dividend growth from the fund. As time goes on, this outperformance is expected to increase.


How would you sum up the main drivers for digital infrastructure?

The primary drivers of our fund’s growth are rooted in the consumption of data. The continuous surge in internet and mobile internet users contributes to the expanding amount of data that needs to be stored. Additionally, the rise in popularity of driverless cars will cause an exponential increase in data consumption. It is estimated that if you are driven around in a driverless car for an hour, it would equate to using an iPhone for 3000 years. Another factor is the significant growth of e-commerce, which has been accelerated by the pandemic. The UK is currently at 25% e-commerce penetration, while Europe and US lag behind. As the trend towards online shopping continues to increase, demand for digital infrastructure will continue to grow. These are positive drivers for our fund’s underlying companies, resulting in rental growth and yielding a considerable return on investment.


How do digital infrastructure assets fair in the context of ESG?

Humankind’s extensive consumption of data requires significant amounts of electricity, with data centres accounting for about two to three percent of global electricity usage. However, it is important to note that public data centre companies, which we invest in, own the most efficient data centres and are increasing their use of renewable energy sources. About two-thirds of the holdings in the Gravis Digital Infrastructure Income Fund have a net-zero pathway and are actively trying to reduce their power consumption to reach net-zero. The second point on ESG is the social side, which became more apparent during the pandemic when online communication was the only way to stay in touch and conduct business. This was made possible by data centres, communication towers, and e-commerce fulfilment centres, highlighting their importance in our modern digital world.


Are there any sector-specific risks that investors need to bear in mind in this context?

We address the environmental risk that comes with being a big consumer of data. We focus primarily on developed markets, where there is a significant opportunity in digital infrastructure. The assets we invest in are owned by us, with a rule of law and respect for property rights. Investors should be cautious about investing in Emerging Markets, where the ownership of assets can be uncertain, and authoritarian states can seize control of valuable data centres. Investing in the highest quality assets offers the greatest potential for rental growth. There are two sources of rental growth – contractual rental growth and annual bumps. In the US, the annual escalator is typically 3%, while in continental Europe, rents are typically linked to CPI, which is growing at a faster rate than 3%. Ultimately, the yield plus mid-to-high single-digit dividend growth from the fund should be rewarding.


What would you say were the key opportunities for investors?

At Gravis, we believe that the main opportunities lie in the four types of digital infrastructure assets. That’s why we’ve created a diversified portfolio of funds with 29 investments, all of which are the top owners and operators of digital infrastructure assets. We see the best opportunities in developed markets, with a focus on owning towers, data centres, logistics assets and networks, and building a well-diversified portfolio.


Gravis. Important Notice (2023)

Past performance is not indicative of future performance, the value of your investment may go down as well as up. This video is published for general information only and is not to be relied upon in any way. Although high standards have been used in the preparation of the information, analysis, views and projections presented in this video, no responsibility or liability whatsoever can be accepted by Gravis for any loss or damage resultant from any use of, reliance on, or reference to the contents. As a general report, the views and opinions contained herein may not necessarily represent views expressed or reflected in other Gravis communications, strategies or funds.


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