Data center Real Estate in Nigeria – Build or lease?

Introduction

Data centers are designed to house a large amount of IT equipment used to store and process important applications or data. A data center typically contains servers, storage sub-systems, routers, firewalls, uninterruptible power supplies, cooling systems, fire control equipment, backup generators, and external network connections. Unlike a server room that is normally located in a room at an organization’s headquarters, a data center is an entire building dedicated to storing computer equipment for use by one or more organizations.

In this age of heavy reliance on technology, especially on IT solutions, data centers play a critical role. This article looks at Nigeria’s data center real estate sector with specific reference to considerations for building or leasing of data centers in Nigeria.

Overview of data center real estate in Nigeria

The Nigerian data center market is one of the fastest-growing markets in Africa. Increasing investments in the industry are largely driven by increased demand for data services, digitization, improved infrastructure, and rising e-governance. The COVID-19 pandemic has also affected the growth of the data center industry.

According to GlobeNewswire’s Nigeria Data Center Market Investment Report 2021-2026, more than 90% of the country’s data is being hosted abroad as most public institutions prefer to host their data overseas. There are currently 11 data centers in Nigeria and despite growing capacity to meet projected increase in demand, the current capacity utilization of existing data centers is thought to be less than 30%, despite the investment of about USD220 million in data center operations. This clearly shows that local utilization does not meet expected levels.

With the recent regulations put in place by the government in favor of local data hosting, it is expected that companies and government Ministries, Departments and Agencies (MDAs) will look to develop their own data centers or lease space from data center infrastructure providers. The overall effect will be seen in the development of data center real estate in Nigeria.

To build or lease?

Companies and government parastatals must consider several factors before deciding to build their own facility or lease space in another vendor's data center. Generally, the decision to purchase or build a data center will involve identifying suitable commercial real estate, conducting due diligence, negotiating the land/building purchase, obtaining development permits and operational licenses, developing the data center and installing the appropriate infrastructure, staffing and security among others. These steps and phases of the data center construction process are time consuming and highly capital intensive, making data center construction less attractive.

However, when companies build their own data center, they have complete control and better security in terms of access to the facility. Companies also have the liberty to dictate the data center’s design and whether or not to lease any unused space for profit.

In contrast, by leasing space from a data center provider, most of the initial difficulties are avoided and only a fraction of the time and expense is required. Leasing data center space avoids the deployment of huge capital expenditure (CAPEX), as the data center is paid for as a recurring operating expense. In addition, companies and government parastatals usually do not have the technical workforce and resources to manage a dedicated data center all year round. This problem is solved by leasing data center space, as vendors are able to provide the manpower and resources needed to easily manage the data and IT needs of businesses.

Disruptive technologies are regularly being introduced to drive changes in business operations. Technologies such as AI, big data analytics, and machine learning all come with a new set of requirements that data center providers are best positioned to provide, maintain, and manage. Overall, there are significant advantages to companies leasing data center space over building and operating a data center.

Legal and commercial terms for leasing data center spaces

In Nigeria, there is no law that specifically governs the leasing of data center spaces. Apart from basic leasing laws, the parties to the transaction are mostly guided by the terms of their commercial agreement as long as the essential elements of a valid lease contract are satisfied. Given that there is no single legislation governing the establishment, licensing and operation of data centers in Nigeria, it is important for a potential investor in the data center industry to consult and obtain proper advice from legal practitioners with expertise in real estate, corporate/commercial, intellectual property, energy infrastructure financing and construction, data security, regulatory compliance, tax and dispute resolution.

Here are some of the key legal and business terms to consider in data center leases:

• Rental – This is usually based on size of the space leased or the amount of power used.
• Space size and equipment – Parties must agree on the exact square meters of space to be leased, the relevant equipment the tenant is allowed to install and whether additional space (eg roof tops) can be used.
• Service Level Agreements – This is critical and must be included in the agreement to clearly indicate service level expectations and consequences for breach of service levels.
• Other vital terms to be negotiated and agreed upon are cooling, humidity, power, connectivity, and data capacity as these are key elements of a data center lease. It is essential that the provider commits to an uninterrupted power supply and further guarantees adequate cooling and the capacity required by the tenant.
• Maintenance and repair – The lease agreement should specifically identify the party responsible for maintenance and repair of the data center infrastructure, compliance with applicable standards among others.
• Term and renewal – The term of the lease should be carefully negotiated to ensure stability and security of tenure. Renewal options are also to be considered.
• Some other legal matters to be addressed in the lease agreement include liability, indemnification, data protection and security, intellectual property and other relevant clauses, as the parties may agree to suit their particular transaction.

Recommendations

Legal and Regulatory Framework

Government is getting more involved and data center compliance and certification requirements are on the rise. Regulations require companies to host their data locally. It is therefore necessary to strengthen the enforcement of existing regulations.

Sale and lease buy back

An option to be considered by industry players and new investors is a sale and lease back of data centers. Large companies with their own data centers can sell them to bigger operators and lease only the necessary space, power, ancillary infrastructure, facilities, and services to the operator; thereby cutting costs and taking advantage of increased efficiencies that make their operations more sustainable. For an investor, a sale and leaseback guarantees quick returns as there is already a primary tenant making it easier to lease unused space and power.

Tax incentives

Given the huge capital expenditure required for data center development and the compelling need to improve data centers in Nigeria, the government should consider providing tax incentives and rebates to stimulate investment in this sector. The relevant regulatory agencies should review the current tax regime relating to data center tax issues, data center development incentives, and legislative issues related to taxes on data center construction and operation.

Cheaper power solutions

Power supply instability affects businesses generally in Nigeria as this causes huge costs implications for data center operators and tenants alike in terms of providing heavy duty backup generators. Power availability will be a big boost in reducing operational costs. Government investment in renewable energy such as solar energy offers viable alternatives to solve power issues.