Data centers are designed to house a large amount of IT equipment used to store and process critical applications or data. A data center typically contains servers, storage subsystems, routers, firewalls, uninterruptible power supplies, cooling systems, fire control equipment, backup generators, and external network connections. Unlike a server room which is usually located in a room at an organization’s headquarters, a data center is an entire building dedicated to storing computers for use by one or more organizations.
In an era of heavy dependence on technology, especially on IT solutions, data centers play an important role. This article discusses the data center real estate sector in Nigeria with specific reference to considerations for building or leasing data centers in Nigeria.
Overview of data center properties in Nigeria
The Nigerian data center market is one of the fastest growing in Africa. Increasing investments in the industry are largely driven by increased demand for data services, digitalization, infrastructure improvement, and increased e-governance. The COVID-19 pandemic has also affected the growth of the data center industry.
According to GlobeNewswire Data Center Nigeria Market Investment Report 2021-2026, more than 90% of the country’s data is hosted offshore as most public organizations prefer to host their data offshore. There are currently 11 data centers in Nigeria and despite the increased capacity to meet the expected increase in demand, the current capacity utilization of the existing data centers is believed to be less than 30%, despite the investment of about US$ 220 million in data center operations. This clearly indicates that the domestic use does not meet the expected levels.
With the recent regulations put in place by the government in favor of local data hosting, it is expected that companies, ministries, government departments and agencies (MDAs) will be looking to develop their own data centers or lease space from data center infrastructure providers. The overall impact will be seen in the development of data center properties in Nigeria.
To build or rent?
Businesses and quasi-governmental organizations should consider several factors before deciding to build their own facilities or rent space in another vendor’s data center. Generally, the decision to purchase or build a data center will involve identifying the appropriate commercial properties, conducting due diligence, negotiating the purchase of land/building, obtaining development permits and operating licenses, developing the data center, installing appropriate infrastructure, staffing and security. Among other things. These steps and stages of the data center creation process are very time consuming and capital intensive, which makes setting up a data center 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 are also free to dictate the design of the data center and whether or not they will rent any unused space for profit.
In contrast, by renting space from a data center provider, most of the initial difficulties are avoided and only a fraction of the time and expense is required. The leasing of data center space avoids deploying massive capital expenditures (CAPEX), as data center costs are paid as recurring operating expenses. In addition, companies and government semi-governmental organizations typically do not have the technical workforce and resources to run a dedicated data center all year round. This problem is solved by leasing data center space, where vendors can easily provide the manpower and resources to manage the data and IT needs of businesses.
Disruptive technologies are regularly introduced to drive changes in business operations. Technologies such as artificial intelligence, big data analytics, and machine learning are coming with a new set of requirements that data center providers are better positioned to provide, maintain, and manage. In general, there are significant advantages to companies that rent space in a data center over building and operating a data center.
Legal and commercial conditions for leasing data center spaces
In Nigeria, there is no law specifically governing the leasing of data center space. Aside from basic lease laws, the parties to a deal are often guided by the terms of their commercial agreement as long as the essential elements of a valid lease are met. As 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 appropriate advice from legal practitioners with expertise in real estate, corporate/commercial, intellectual property, financing and construction of energy infrastructure, data security, regulatory compliance and taxation and dispute settlement.
Here are some of the key legal and business terms to consider in data center leases:
- Leasing – This usually depends on the size of the leased space or the amount of energy used.
- Size of space and equipment – the parties must agree on the exact square meters of the space to be rented, the related equipment the lessee is allowed to install and whether additional space (eg roofs) can be used.
- Service Level Agreements – This is critical and should be included in the agreement to clearly indicate service level expectations and consequences for breaching service levels.
- Other vital terms that must be negotiated and agreed upon are cooling, humidity, power, connectivity, and data capacity, as these are the core elements of a data center lease. It is essential that the provider adheres to an uninterruptible power supply and also ensures adequate cooling and capacity required by the tenant.
- Maintenance and Repair – The rental agreement must specifically specify the party responsible for the maintenance and repair of the data center infrastructure, and compliance with applicable standards among other things.
- Term and Renewal – The term of the lease must be carefully negotiated to ensure stability and security of tenure. Renewal options are also to be considered.
- Some of the other legal matters to be addressed in a rental agreement include liability, indemnity, data protection, security, intellectual property and other related clauses, where the parties may agree on the appropriateness of their particular transaction.
Legal and Regulatory Framework
Government involvement is increasing, and data center compliance and certification requirements are also increasing. Regulations require companies to host their data locally. It is therefore necessary to strengthen enforcement of existing regulations.
Selling, renting, repurchasing
Selling and renting out data centers are options that need to be considered by industry players and new investors. Large companies with their own data centers can sell to larger operators and lease space, energy, additional infrastructure, utilities and services only to the operator; Thus reducing costs and benefiting from increased efficiencies that make their operations more sustainable. For the investor, the sale and leaseback guarantees fast returns as there is already a primary tenant facilitating the leasing of unused space and energy.
Given the huge capital expenditures required for data center development and the urgent need to improve data centers in Nigeria, the government should consider introducing tax incentives and rebates to stimulate investment in this sector. Relevant regulatory agencies should review the current tax system related to data center tax issues, data center development incentives, and legislative issues related to taxation on data center construction and operation.
Cheaper Energy Solutions
The instability of the power supply affects the business in general in Nigeria as this causes heavy costs for data center operators and tenants alike in terms of providing heavy duty backup generators. Energy savings will be a major boost in reducing operating costs. Government investment in renewable energy such as solar energy provides viable alternatives to solving energy problems.