Riding the AI wave: Australia's booming data centre investment opportunity

As cloud services, data generation and now artificial intelligence (AI) skyrocket, the demand for scalable, high-performance data centres is surging like never before. Investors are flocking to this sector, eager to capitalise on its apparently endless growth.

A recent survey by TMT Finance, featured in DLA Piper's Navigating Global Growth in Data Centres - Riding the AI Wave report, highlights that 49 per cent of respondents anticipate a significant uptick in data centre acquisitions by financial sponsors. Close behind, 40 per cent expect strategic acquisitions by data centre operators to rise.

Data centres – large, networked computer servers used for data storage, processing and distribution – are evolving globally, from compact 500 sqm facilities to sprawling 1 gigawatt mega-campuses, especially in the United States.

This shift is attracting a diverse range of investors including superannuation and pension funds and alternative asset managers. For instance, AustralianSuper invested $2.2 billion in US data centre operator DataBank in 2024, following a $2.5 billion stake in Vantage Data Centers EMEA in 2023. Meanwhile, Blackstone led a consortium to acquire a majority stake in AirTrunk for $24 billion in late 2024.

TMT Finance projected the global data centre market would be valued at around $US300 billion in 2024, with a robust compound annual growth rate (CAGR) of approximately 10 per cent over the next five years. 

That said, our experience over the last 10 years has been that growth projections for the sector have usually turned out to be conservative, so we wouldn't be surprised if the CAGR was substantially higher than this forecast.

"The primary driver of investment remains the strong demand for AI, which requires expansive, energy-intensive infrastructure," says Anthony Day, Partner at DLA Piper. "We are now seeing the development of hundreds of megawatt campuses for AI applications, requiring billions in capital."

Australia's data centre landscape

Australia's data centres are smaller compared to giants in the US and China. Data centre capacity refers to the total amount of electrical power a data centre can draw on or use at any given time, measured in megawatts (MW), which is equivalent to 1 million watts. AirTrunk's SYD1 data centre, with a capacity of more than 130 MW, is one of the largest in the region. However, in the US, mega-campuses are being developed with some already servicing 1000 MW – 1 gigawatt – of capacity.

"The data centre industry in Australia has been experiencing explosive demand. Developers are building rapidly but are under pressure to keep up with demand, despite the high cost of capital. As a result, operators are exploring creative strategies to fund these developments," says Kate Pickthall, Partner and Head of Real Estate – Australia at DLA Piper.

Global players like Equinix and STACK are expanding rapidly in Australia, particularly in Sydney and Melbourne, which house about 80 per cent of the country's data centre capacity. 

Local leaders like AirTrunk, NEXTDC, CDC, Goodman Group and Macquarie Technology are also strengthening their positions, with the market expected to nearly triple in the next five years.

Regulatory and sustainability trends

Looking ahead, we expect the continued growth in scale and importance of the data centre sector to drive an accelerated regulatory response in Australia, as the government becomes increasingly aware of the critical need to secure this infrastructure.

The Australian Government has already taken steps to enhance the regulatory framework surrounding data centres. For instance, classifying them as "Systems of National Significance" under the Security of Critical Infrastructure Act 2018 underscores the sector's strategic importance.

Given the immense energy demands required to operate and maintain data centres, many industry players are turning to renewable energy sources such as solar and wind to power their infrastructure. Data centre operators are increasingly likely to look to underwrite or access new renewable capacity to reduce electricity costs for their customers, as renewables are the lowest-cost source of new generation capacity.

Moreover, adopting sustainable practices is crucial to address the environmental impact of data centres. The industry is increasingly aware of its carbon footprint and is taking proactive steps to mitigate it. 

For instance, AirTrunk has signed a long-term power purchase agreement (PPA) with Google and OX2 to develop a new solar farm in Australia, expected to add 25 megawatts of renewable energy capacity to the grid. This initiative is part of AirTrunk's broader commitment to match 100 per cent of its electricity consumption with renewable energy by 2030.

Energy storage and connectivity are also key considerations.

"Successful operators will be those who can innovate in energy management, utilising renewable energy with firming technologies like hyper-scale batteries and adopting scalable energy storage solutions, " says Chris Mitchell, Partner at DLA Piper. 

While localised energy storage solutions will be required, repurposing existing energy infrastructure may also need to be considered, due to the extended time to develop new transmission lines. Evidence of this can already be found in the US, where decommissioned power plants such as Three Mile Island in Pennsylvania are being repurposed to provide electricity to power data centres.

Australia is set to remain a key player in the Asia-Pacific data centre market, thanks to ongoing investment, government support and sustainability initiatives. Despite challenges, the commitment to infrastructure development and green energy solutions promises a bright future for the industry.