The REIT owners of data centres are now facing competition from the trio of tech firms that were once their biggest customers, short-seller Jim Chanos has warned.
Chanos, who predicted the fall of Enron two decades ago, is raising several hundred million dollars for a fund that will take short positions in US-listed real estate investment trusts.
“This is our big short right now,” Chanos said. “The story is that although the cloud is growing, the cloud is their enemy, not their business. Value is accruing to the cloud companies, not the bricks-and-mortar legacy data centres.”
Data centres owned by groups such as Digital Realty Trust and Equinix are vast warehouses of servers that power large swaths of the internet.
Last year $915bn alternatives manager Blackstone bought QTS Realty Trust for around $10bn, at the time the largest deal in data centre history.
Mike Forman, managing director of Blackstone Real Estate, said in February that the deal was designed to capitalise on “exponential” growth in data creation and storage requirements. “Unprecedented demand for data centres is expected to grow at double-digit rates over the next decade in the US and internationally,” he said.
The three biggest cloud providers, Amazon Web Services, Google Cloud and Microsoft Azure, are by far the largest tenants of data centres. Chanos’ thesis is that these three “hyperscalers” now prefer to build data centres to their own design rather than moving into existing ones; and when they do outsource, they typically offer low returns to their development partners. Chanos also said he believes the REITs are overvalued and are in for a period of declining revenue and earnings growth.
“The real problem for data centre REITs is technical obsolescence,” said Chanos. “Their three biggest customers are becoming their biggest competitors. And when your biggest competitors are three of the most vicious competitors in the world then you have a problem.”
