In summer 2024, a UK local council turned down a data centre project near London’s busy M25 motorway, arguing that the proposed 775,000sq ft development would harm the area in “both spatial and visual terms”. A few months later, the national government overturned the decision.
Data centres contribute £4.7bn in gross added value to the UK economy annually and employ more than 40,000 people. Yet, as the Buckinghamshire development demonstrates, developers must contend with many regulatory and legal complexities. “Data centres are a business-critical technology service, but their importance to the wider economy often gets overlooked or misunderstood at the local level,” says Jocelyn Paulley, a Partner and Leader of the Data Centre Sector at international law firm Gowling WLG.
Planning is among the thorniest challenges. Local councils may not count the considerable economic benefits of data centres, failing to distinguish them from more conventional commercial developments. Another factor is that data centres have yet fully to win the public relations game with local residents. “Getting approval is a big barrier, and introduces a significant element of uncertainty,” says Matthew Evans, Chief Operating Officer of TechUK, the sector’s leading trade association. “It can take easily up to two years for a data centre to get planning permission, and it’s very uneven in terms of what will get approved.”
Power is a second major challenge. Developers must seek a connection agreement from one of the UK’s distribution network operators (DNOs), which own and operate the electricity distribution infrastructure. But delivery times are never fixed; provisional dates can easily get pushed back, leaving developers facing costly delays. “It’s a question of juggling multiple and very expensive balls,” says Tom Baines, a Partner at Gowling WLG specialising in commercial real estate development and investment. “It takes rigorous project management and a detailed knowledge of the legal and regulatory landscape.”
Growing momentum
In spite of these difficulties, the UK’s data centre sector is growing rapidly, and the concentration of projects around London has begun to spread to other urban centres around the country, with significant growth in Birmingham, Manchester and Newcastle. As of 2024, the UK ranked third globally after the US and Germany for the number of data centres.
At the national level, Britain’s Labour government has endorsed the sector. Proposed changes to the National Planning Policy Framework (NPPF) would elevate data centre projects, specifically mentioning them as key infrastructure that policy should support. There is also a move to allow developments to be consented to under the Nationally Significant Infrastructure Projects (NSIPs) process, which would shift approvals away from local authorities to the Secretary of State.
Adding to the momentum, the government designated data centres as “Critical National Infrastructure” – a change that offers them increased protection and support in the event of incidents. While these developments are positive for the sector, the rapidly shifting regulatory landscape, as well as the often diverging approaches of local and national governments, make it essential to establish strong legal support across the multiple areas that combine in data centre projects.
Shifting business models
An additional complexity for data centre developers is the shifting mosaic of ownership structures, each of which implies a different business model, and requires specialist knowledge to understand and establish terms and obligations. Paulley observes that traditional real estate investors have often found themselves in unfamiliar territory when projects revolve around services rather than leases, which are more straightforward. “Selling service agreements doesn’t have the same security of revenue stream as a lease model, and it requires an understanding of the sector and what the data centre actually provides,” she says. “For some investors, there has been a steep learning curve.”
Even so, real estate investors are now likely to see new opportunities in the sector as the leasing model regains popularity, thanks largely to the rise of the so-called hyperscalers. Companies such as Google, AWS and Microsoft now account for an estimated 41 per cent of global data-centre capacity, compared with just six years ago when 60 per cent of capacity was in on-premises facilities. And they are favouring leases as a way of gaining additional rights and control over the services they produce.
Yet, as Baines points out, the inherent complexity and multidisciplinary nature of the sector means that developers need to be aware of – and even anticipate – the challenges that inevitably arise. “You need the knowledge and experience to find solutions so that projects can go forward in a timely fashion,” he says. “Competition for sites can be fierce, and developers don’t want to lose their opportunity.”
