Why South Africa is tipped for a data centre surge

Data centres are shaping up to be a big hit for African investors, delivering returns of up to 20% a year — but only if countries like South Africa can demonstrate that they have sufficient stable regulation and reliable power.

In an interview this week, Mark Moorhouse, head of infrastructure and project finance at Sanlam Alternative Investments, told Currency that data centre investment is primed to “land in a big way” on the continent in the next few years, providing considerable returns for investors. 

“Right now, South Africa, and Africa in general, is still far behind the rest of the world when it comes to data centres, but there is no doubt this is coming — it’s just the timing of when this happens, and the arrival of the really large cloud-computing giants that isn’t clear right now,” says Moorhouse. 

Already, there are signs this is happening. Since 2020, Microsoft has spent R20.4bn building what it calls South Africa’s first “enterprise-grade data centres” in Joburg and Cape Town. And last year, it pledged R5.4bn to build another AI-focused data centre in Kosmosdal, Centurion to allow Africa “to become a producer of AI technology, not just a consumer”. 

Hosting data centres, which house technology infrastructure essential for processing and storing data, would seem to be an obvious opportunity for countries in Africa, where South Africa and Kenya have been the leaders due to their relatively lower power and construction costs. It would also benefit local companies, which could use the centres to host their digital services. 

Yet this expected boom hasn’t happened. 

Consultancy McKinsey estimated in November that only 1% of global data centre capacity is located in Africa. But McKinsey said Africa should prepare for a period of “accelerated growth”, with demand set to grow by 3.5-5.5 times its current modest size.

“The combined installed capacity of the continent’s top five markets, Egypt, Kenya, Morocco, Nigeria and South Africa, remains under 500MW, less than what France alone had in 2024,” it said. By 2030, however, this could hit 1.5GW-2.2GW of installed capacity. 

This accords with other projections. Market research company Arizton expects investment in African data centres to hit $8.7bn in the next five years, growing by 15.7% a year to about 125,000m². 

Moorhouse says Sanlam Alternative Investments is betting big on digital infrastructure such as data centres and mobile towers, in part because of the reliable returns it provides for investors. The alternative investments division has about R200bn in assets under management in total. 

While renewable energy has been a big focus for infrastructure investors to this point, Moorhouse says the nascent data centre sector could provide even better growth.

“We see the large hyperscalers – the companies like Google, Microsoft and Meta – looking to use data centres in Africa in a big way. If you look at the investment going into data centres in the US, it’s mind-boggling. I can only see Africa following the trend, there is no reason for it not to.”

For its part, Sanlam has invested alongside Teraco, which is owned by the New York Stock Exchange-listed data centre business Digital Realty, in data centre facilities in Isando, Joburg. Digital Realty has more than 300 data centres across 25 countries.

While these are encouraging signs, there is little dispute that South Africa’s hasn’t leveraged its cost advantage as much as it could have – something Moorhouse puts down to often unflattering views from foreign investors about the perils of investing on the continent. 

“The perception from some is that it’s still difficult to do business in certain African geographies, particularly because the regulatory environment can change quickly,” he says. “Data centre investments will come anyway, but if we address these issues, it can definitely speed up.”

This underscores McKinsey’s view that while data centres could be the backbone of the continent’s digital economy, “co-ordinated action” is needed to make sure this happens. “The challenges – power reliability, regulation, and investment risk – are real, but proven solutions ranging from energy pooling to innovative financing show they can be overcome,” it said. 

Moorhouse echoes this, saying that in recent years, trust levels have improved in several African countries, which has provided additional reassurance to investors. 

“I’ve been investing across Africa for 20 years, and I’ve never seen the sort of positivity we see now. This is happening because more and more transactions are structured properly between the public and private sectors to limit the risks of any project. These are the kinds of things that will make a big difference,” he says. 

Playing catch-up

Mamiki Matlawa, group business development executive at engineering company Actom, says South Africa – and the rest of the continent – has largely been left behind when it comes to data centres as it has fallen behind in the technology race. 

“But there is hope. As AI becomes more mainstream in more African countries, and e-government becomes more accepted, then you’ll see a greater focus on data centres. That would help to accelerate it,” she says. 

She says that initiatives like that of Microsoft provide hope that the technology gap between Africa and the rest of the world could still close. 

Certainly, given the investment returns on offer, there is likely to be no shortage of capital. 

Moorhouse says Sanlam is targeting returns on its data centre investment of between 18% and 20%, which trumps the sort of returns for mobile towers, which are closer to 14%, or renewable energy projects.

“It’s about catching the growth curve at the right time. We were one of the early investors in long-haul fibre around 2007, and the returns for the first decade or so were fantastic, but as it matured, this flattened out. At data centres, we’re still in the growth stage, so we’re still seeing good growth,” he says.

It’s an important point because the myth has always been that infrastructure investments in connectivity, data or power, which have a socially beneficial element, provide lower returns. As it turns out, many of these projects often provide returns that would trump that of the S&P 500 index.

“This view that you need to sacrifice returns to invest in infrastructure on the continent is completely wrong, which is why so many asset managers want to invest – we just need more bankable projects,” says Moorhouse.

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