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The UK’s digital infrastructure investment opportunity

February 2021

The low carbon investment opportunity underpinning the digital revolution

Following years of ultra-low interest rates and depressed bond yields, infrastructure investors are seeking alternatives with low-risk defensible characteristics offering strong and predictable long-term cash flows.

Digital infrastructure markets, particularly fibre, have seen historical underinvestment in the UK. With the digital revolution transforming business models, industries and consumer behaviour, not least in the context of Covid-19, the need for investment in underlying digital infrastructure has become of critical strategic importance. We therefore see a huge investment opportunity over the next ten years. With our own estimates suggesting the size of the opportunity could be as much as £100bn - this is certainly no flash in the pan.

Investors are also looking to optimise their portfolios in other ways. Spurred on by the Government’s call to ‘build back better’ and drive for net zero by 2050, they’re seeking to boost the proportion of sustainable businesses they invest in. Digital infrastructure’s pivotal role in the net zero agenda – offering alternatives to physical travel/commuting, enabling smart grids, advanced logistics and industrial automation, for example – further underpins the investment case.

That said, digital infrastructure is not a carbon panacea. Issues remain around how to deliver the digital footprint in a more sustainable way – particularly the energy intensive data centres segment, which estimates suggest consumes as much as 12% of UK electricity.

Areas of opportunity

Fibre networks

Increasingly recognised as the ‘fourth utility’ alongside gas, electricity and water, fibre networks are rolling out fast across the UK. But with fibre-to-the-home (FTTH) coverage still below 20% of households, there is significant white space to target, particularly as business models shift and many workers may continue to work from home even after the pandemic recedes.

Our recent work in this area reflects investors’ focus, supporting more than 20 UK fibre deals in the past two years, including supporting Airband to raise capital to fund fibre infrastructure for 500,000 homes in the West of England and advising Infracapital and Fibrus on Project Stratum in Northern Ireland - the largest Government funded project to provide ‘universal broadband’ to rural communities in the region.

In the context of companies in funding and roll-out phases, the market is highly fragmented. Indeed, we are currently tracking around 70 active fibre players. And as the market matures and the white space diminishes, we expect to see a phase of rapid M&A-driven consolidation. Fibre operators and their investors should be thinking about positioning themselves to ‘win’ in the consolidation phase today - for example by thinking about technical network design, roll-out strategy and target geographies.

There may also be an opportunity for a wholesale fibre aggregator to enter the market to offer large retail ISPs a simple way of accessing the new networks at scale and to support new networks forming attractive wholesale relationships. This may represent an attractive asset-light opportunity.

5G

As operators upgrade their 4G mobile networks to 5G, they are opening the way to a vast array of new mobile applications ranging from autonomous vehicles to smart factories to rural broadband. However, the higher frequency – and shorter range – of some 5G network deployments means that, compared to 4G, it requires about 5-10 times the density of nodes or towers.

Mobile operators are likely to target their first wave of network upgrades on their existing towers (macrocells), but in the future expect to deploy 5G ‘small cells’ on existing street furniture such as streetlights, bus shelters and traffic lights. The economics of such deployments are likely to be most attractive under a carrier-neutral/shared infrastructure mode, creating an opportunity for a real assets player to provide the required space, power and possibly antennas. We were involved in just such an enterprise as part of Transport for London’s ‘Connected London’ project. Initiatives like this will ultimately pave the way for developing the enabling infrastructure to support smart cities of the future.

5G will also create opportunities for private industrial 5G networks (for example on industrial campuses, transportation hubs and digital health networks) stimulating further need for non-traditional network investment and partnerships.

Data centres

These are vital enablers of digital services, and here we see two trends playing out. One is towards very large ‘hyperscale’ data centres: used by large Big Tech enterprises. These are attracting strong investment from sovereign wealth, real estate and infrastructure funds.

The other growth area is the development of edge data centres. These are smaller facilities located close to the customers they serve, especially users requiring high capacity and low ‘latency’ (the time taken to deal with a request). The market and use cases for edge data centres are relatively nascent. The timing and quantum of demand is somewhat uncertain implying a degree of risk (albeit, when demand does materialise, edge data centres are likely to represent a significant growth opportunity).

The time is now

Success in the UK’s fast-evolving digital infrastructure landscape will depend on the ability to think differently. Especially crucial will be understanding the interrelationships between the various factors at play – from technological advances to consumer demand to the carbon agenda to conditions in the capital markets.

And the time to get on top of all this? Today. Because the real growth is only just beginning.

Contact us

Asim Iqbal

Asim Iqbal

Infrastructure M&A Director, PwC United Kingdom

Tel: +44 (0)7701 296486

Brian Burns

Brian Burns

Telecoms Strategy Director, PwC United Kingdom

Tel: +44 (0)7718 981190

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