Data centre projects struggle for funds despite soaring demand

• Mena banks demand high security
• Threat to region’s AI growth
• UAE facing capacity crunch

Data centre projects in the UAE are struggling to secure financing in their early stages despite an urgent need for more facilities to meet soaring demand, observers say. 

There are fears this financing gap threatens to slow development and exacerbate the region’s growing shortage of critical data infrastructure needed to fuel digital ambitions.

Johan Nilerud is senior director of strategy and planning at Khazna Data Centers, which claims to be the largest hyperscale wholesale data centre provider in the Mena region. He tells AGBI that banks and investors often have high requirements, typically demanding to see customer contracts as a security measure before committing funds.

“Sometimes you need to build in advance of actually having customer contracts,” he says. “You’d want to secure land and power at an early stage so that you have it ready [for construction].”

The UAE, which hosts the largest concentration of data centres in the Middle East and North Africa, is already grappling with a capacity crunch, driven by surging demand from sectors such as artificial intelligence.

Data centres are critical for AI because they provide the massive computational power and data storage required.

Khazna’s multi-billion-dirham 100 megawatt data centre in Ajman, announced last week, has already secured significant customer commitments 15 months ahead of completion, Nilerud says.

“We don’t expect that much [capacity] will be available once it comes online because the pipeline is very strong,” he says.

While strong demand is a positive sign, Nilerud acknowledges the challenge of keeping up with that demand.

“It’s difficult to build so you have inventory, because obviously all customers want the capacity now, and they can’t find it anywhere on the globe,” he says.

The new facility is Khazna’s largest data centre in the UAE so far and is the first of its kind in the region, because it is specifically designed for the high computing power and scalability requirements of AI.

A report by Knight Frank in 2023 showed spare data centre capacity across the UAE had dropped from the 2010s, with only 9 percent available by the third quarter of 2023.

“The financing models for data centres are still evolving,” a bank executive tells AGBI, declining to be named.

The executive says that, although demand for the facilities is high, the capital-intensive nature of data centres – because of the cost of land, construction and equipment, and their energy requirements – mean they need careful consideration.

This complexity is echoed by credit ratings agency Moody’s, which said in a research note last year that modern data centre construction and expansion will require access to diverse debt markets.

Traditional bank financing, alongside alternative financing sources such as private credit, will play a crucial role in funding these large-scale projects, the agency said. 

John Medina, senior vice-president at Moody’s Ratings, pointed to refinancing risk, and also the potential risk involved in lease renewal.

“The idea of renewing within the next five years is probably not a big risk, because we have a mismatch between demand and supply,” he said in a podcast in July.

“But when you go 10 or 15 years from now, the entire market is going to be different. We are doubling and tripling in capacity in some markets. The tenant-landlord negotiation profile will be very different.”