Famed short-seller Jim Chanos is taking aim at a new market, data center real estate investment trusts. These trusts own big data centers, but, says Chanos, despite the data centers being at the center of the rise of cloud computing “the cloud is their enemy, not their business. Value is accruing to the cloud companies, not the bricks-and-mortar legacy data centres.” Harriet Agnew reports in the Financial Times:
Short seller Jim Chanos is betting against “legacy” data centres that now face growing competition from the trio of tech giants that have been their biggest customers.
Chanos, who remains best-known for predicting the collapse of energy group Enron two decades ago, is raising several hundred million dollars for a fund that will take short positions in US-listed real estate investment trusts.
“This is our big short right now,” Chanos said in an interview. “The story is that although the cloud is growing, the cloud is their enemy, not their business. Value is accruing to the cloud companies, not the bricks-and-mortar legacy data centres.”
Data centres owned by groups such as Digital Realty Trust and Equinix are vast warehouses of servers that power large swaths of the internet.
The growth in demand for data centres has been a big theme for institutional investors, who are seeking to tap into the global expansion of cloud computing. Last year $915bn alternatives manager Blackstone bought QTS Realty Trust for about $10bn, at the time the largest deal in data centre history.
Mike Forman, managing director of Blackstone Real Estate, said in February that the deal was designed to capitalise on “exponential” growth in data creation and storage requirements. “‘The cloud’ is not literally in the clouds; it is in physical datacentre assets. This all translates into unprecedented demand for data centres that is expected to grow at double-digit rates over the next decade in the US and internationally.”
The three biggest cloud providers, Amazon Web Services, Google Cloud and Microsoft Azure, are by far the largest tenants of data centres. Chanos’s thesis is that these three “hyperscalers” prefer to build data centres to their own design rather than moving into existing ones; and when they do outsource, they typically offer low returns to their development partners. Chanos also said he believed that the real estate investment trusts were overvalued and in for a period of declining revenue and earnings growth.
“The real problem for data centre Reits is technical obsolescence,” said Chanos. “Their three biggest customers are becoming their biggest competitors. And when your biggest competitors are three of the most vicious competitors in the world then you have a problem.”
Chanos has built a career out of trying to identify corporate disasters-in-the making. In 2020 he made $100mn from shorting the German payments company Wirecard, which filed for bankruptcy that year after admitting that €1.9bn of its cash probably did “not exist”. But he has also been burnt by a high-profile short position in Elon Musk’s electric carmaker Tesla, whose share price has soared.
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