By Tom Walker, Co-Head of Global Real Estate Securities at Schroders
The future is digital, and the Covid-19 pandemic has both highlighted the importance of the digital transformation and accelerated its development. This transformation – the adoption of digital technology for business or services – is impacting every industry, and almost every country in the world now has a digital strategy to ensure their economy remains competitive.
Digital technologies came to the fore during the pandemic, with millions of people successfully working from home, schoolchildren being taught remotely, consumers buying their groceries online and people maintaining social contact via social media and Zoom calls.
The digitisation of almost every aspect of our lives means that we are now reliant on the infrastructure that enables this connectivity. The ‘mission critical’ nature of this infrastructure is perhaps best highlighted by the categorisation of digital infrastructure staff as ‘key workers’ during the pandemic.
It is clear that digital infrastructure such as data centres, fibre optic cable and mobile phone masts are now so essential to the global economy and society, as a whole, that they are considered as the fourth utility (in addition to water, gas and electricity).
The digital revolution represents a seismic shift in how we live and work and as investors in global cities, we believe that this presents a compelling, long-term investment opportunity.
What is digital infrastructure?
Digital infrastructure is the foundation of the digital economy, it enables the connectivity that we all enjoy and take for granted. The physical assets include data centres, macro towers, small cells, fibre optic cables and sub sea cables.
Information travels from our home or workplace along fibre optic cables into data centres where it can be transferred to the end user. Fibre optic cable will also connect a data centre to a macro tower to enable transmission of data to our mobile devices. When we connect internationally the vast majority of all internet traffic will be via sub sea cables that will ‘land’ in a data centre. Small cells are essential for the roll out of 5G; the 5G radio frequency has less propagation (which means it cannot travel as far and therefore, will require a higher number of points to transmit efficiently).
Demand for digital infrastructure will grow exponentially
Structural trends are driving the strong growth in demand for digital infrastructure. The use of connected devices, such as smartphones, is likely to continue expanding. In 2018, 22 billion connected devices were in use around the world. This is predicted to grow to 38.6 billion by 2025 and 50 billion by 2030.
The data consumed by these devices is also growing rapidly. In 2010, 2 zettabytes of data were consumed. This grew to 33 zettabytes in 2018 and is expected to reach 74 zettabytes by the end of 2021. By 2024, this figure is predicted to reach 149 zettabytes, more than double the 2021 estimate.
Digital transformation will affect every industry
Every sector is digitising due to the efficiencies that can be realised. The roll out of 5G will enable the transfer of larger amounts of data at faster speeds across significantly more devices. For example, it can take as long as 10 minutes to download a film using 4G, whereas with 5G it should take less than 5 seconds.
The most dramatic impacts on our lives are likely to be made in medicine, agriculture and manufacturing. For example, connected devices will allow doctors to monitor patients remotely; high definition cameras on drones will allow farmers to see the moisture content of soil in an area; and connected devices will ensure parts are replaced in factories before they break.
Digital infrastructure is the fourth utility and is mission critical to society
The pandemic has highlighted the importance of digital infrastructure assets, such as mobile phone masts and data centres. Moreover, the crisis has also accelerated its development. During the Covid-19 crisis people were able to successfully work from home, do their grocery shopping online and keep in touch with friends, family and colleagues via online video platforms.
School children and university students were also able to continue with their studies via remote learning platforms. All of this would have been unthinkable only a few years earlier. As the digital transformation accelerates further in the next few years, digital infrastructure will become even more vital for the effective functioning of businesses and society.
Digital transformation is also driving improvements in energy efficiency
Digital infrastructure is also helping to drive the improvements in energy efficiency, the responsible use of natural resources and decarbonisation. Approximately 10 years ago, data centres were predicted to consume about 15% of the world’s energy, today that figure is only 2%. It is estimated that the digital infrastructure industry has eliminated 80% of energy losses over the last 15 years.
In addition, we are now seeing artificial intelligence used to maximise efficiencies with regard to energy consumption. We believe advances in energy efficiency will stay ahead of the growth in demand and use of data, therefore keeping energy consumption static.
The impact of digital infrastructure on society cannot be underestimated. Providing people with the ability to access education, welfare and banking (to name but a few) will dramatically improve their lives. This is why governments around the world prioritise digital connectivity for their citizens. It is clear that access to digital connectivity will help to close the ‘digital divide’ which currently affects many countries.
One of the best examples of digital infrastructure enabling society to operate in an efficient manner is seen in India. As part of the ‘Digital India’ policy, the government has rolled out a welfare app called Aadhaar, which allows the population to access crucial government departments such as, pension payments, healthcare and banking.
Investment opportunity is global
Not only is there a clear path of structural growth for this asset class, as we create and consume more data, but there is also an insufficient quality and quantity of the necessary digital infrastructure needed to enable this digital transformation.
The clearest evidence of this comes from analysing national infrastructure policies. Almost every country in the world now has a specific digital strategy. There are two key reasons for this. Firstly, to ensure that the country can compete in the global economy and secondly, to ensure citizens have access to connectivity to improve their lives and close the ‘digital divide’.
Perhaps it is no surprise to see that the three largest trade areas have the most ambitious digital infrastructure policies: the US, EU and China.
In the US, $2.8 billion has been allocated to spending on digital infrastructure from President Biden’s $2 trillion infrastructure spending plan. The EU plans to spend $200 billion over the next 10 years through its Digital EU programme.
Meanwhile, China, with perhaps the most ambitious global policy, plans to spend the most on digital infrastructure, with $1.4 trillion allocated from a total spending plan of $2.1 trillion.
For investors in global cities like us, the digital revolution creates an array of investment opportunities.
The views and opinions contained herein are those of the authors, or the individual to whom they are attributed, and may not necessarily represent views expressed or reflected in other Schroders communications, strategies or funds.