DeepSeek and data centres: revisiting the investment case
Making sense of the latest trends in property and economics from around the globe
4 minutes to read
The release of the Chinese chatbot DeepSeek seemingly shattered a series of assumptions that have supported massive amounts of fundraising and fuelled sky-high valuations of AI-linked companies.
Perhaps this won't be an industry within which a single winner reigns supreme. Perhaps you don't need very expensive, computationally superior chips. Perhaps you don't need to spend quite so much on infrastructure.
The latter presents the most serious question for the real estate sector. The value destruction across the AI industry has been awe-inspiring; Nvidia tanked by $589bn in a single day, the largest wipe out in stock market history. But power companies also fell significantly, given the fact that DeepSeek uses fewer computational resources and, by some estimates, as little as 10% of the power used by its American rivals. The AI industry accounts for an incredible three quarters of overall U.S. power demand forecasts through 2030-35 in most projections, according to a much referenced note to clients from the US investment bank Jefferies.
Data centres
What does this mean for the data centre market, which is expanding rapidly on the back of demand from the companies at the heart of the DeepSeek sell off?
Just this week, OpenAI and SoftBank revealed an artificial intelligence infrastructure project named Stargate that will spend $100bn in the near term and perhaps as much as $500bn over the next four years - a project that must have been in the pipeline long before the release of DeepSeek. Spending in Europe is also surging: transaction volumes across the EMEA region hit £1.8 billion in the first half of 2024, a 168% increase on the same period a year earlier, according to Knight Frank data. Data centres accounted for 12% of all Greater London commercial real estate investment volumes in the second quarter of last year.
This is going to take time to unpick. For starters, there is considerable scepticism over some of the numbers touted by DeepSeek. And though the rout at power companies was significant, some stocks remain about twice as valuable as they were this time last year.
Evolution, not revolution
Sector experts and investors with significant stakes appear sanguine so far. The Jefferies analysts called DeepSeek “part of an ongoing evolution, not revolution” in the AI and software markets, adding that the power selloff was overblown. Citi analyst Siraj Ahmed also told reporters that he didn't expect DeepSeek to impact near-term demand for data centres, adding that the bank expects "cheaper models/lower compute costs to accelerate AI adoption." The long-term outlook is less clear, Ahmed admitted.
Blackstone published full year results yesterday and Q4 was among the best quarters in company history. The FT leads on the $1.4bn in performance revenues earned during the quarter, "mostly from perpetual infrastructure and credit funds that either own or lend money to data centres."
In a call with analysts and reporters after the release, Blackstone president Jonathan Gray offered similar sentiments to Ahmed on DeepSeek, namely that compute costs will come down and adoption will accelerate.
“You’re looking at what’s going on, and it could have an impact on the nature of usage, but we’re still evaluating it. We’re talking to people about it, and at this point, we still see a lot of need for digital infrastructure and power,” he added, according to the FT report. “We still think this is a very favourable place to deploy capital.”
Housing supply
The extent of the looming housing supply crunch became clearer this week following the release of data from Molior. Anna Ward considers the outlook: just 6% of private sites under construction in London right now are scheduled to run into 2027 – none are set to run past 2028.
The national picture will also worry the government: residential planning approvals across England hit a fresh record low in the third quarter last year, with just 7,344 plans granted—a significant 40% drop from the most recent peak in Q3 2016, when over 12,900 approvals were secured.
"With dwindling stock and strong housing demand, developers have a chance to secure buyers and establish a foothold as competition lessens and new developments grow scarcer," Anna writes. For a deep dive on the housing pipeline in Birmingham, read our new report, out this week.
Cracks emerge
The housing market showed remarkable resilience through 2024. Mortgage approvals for house purchase climbed by 500 to 66,500 in December, according to Bank of England figures out this week. That's up more than 30% compared to the same month a year earlier and down just 1% compared December 2019, before the onset of the pandemic
Still, cracks are now beginning to emerge following an uptick in mortgage rates. House prices increased by just 0.1% in January, from 0.7% a month earlier, Nationwide reported this morning. That pares the annual growth rate to 4.1%.
“Higher borrowing costs are weighing on buyers but demand still feels artificially strong," Knight Frank's Tom Bill tells the Standard. “Sub-4% mortgage offers that pre-date the Budget and an April rise in stamp duty means demand in the first quarter of the year is likely to be more robust than in the second. Until rate cut expectations improve and mortgages starting with a 3 re-appear, we expect further downwards pressure on house prices.”
In other news...
Gloom deepens among UK business (Reuters),