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Roula Khalaf, Editor of the FT, selects her favourite stories in this weekly newsletter.
Dear reader,
Every business journalist holds a special affection for certain sectors or companies that they covered at important moments in their career. (The reverse is also true: I covered investment banks for this column in New York in 2008 and 2009. Enough said.)
Commercial property is one of those sectors for me, thanks to a couple of years as a young reporter roaming the UK writing about the sheds market in various regions. Sheds — or old-school warehousing — have been reinvented as the modern logistics space. The next big thing is data centres. Lex recently took a look at three different aspects of the data centre and artificial intelligence boom:
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The European industrial real estate market has barely recovered from the leasing frenzy for last-mile logistics space during the ecommerce boom of the pandemic. AI-driven demand for data centres looks like being the next one. Limited supply of data centres in key low data latency (low delay) hub locations — and in effect unconstrained demands — should translate into pricing power for landlords. Rental growth is expected to be twice that of any other sector. Read more here.
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The big US tech companies are behind this surge in demand. They are taking a capital-intensive bet on AI in their rush to fill rural America with vast, windowless data centres. The result is large increases in capital expenditure, which will show up in rising depreciation in years to come. For now, profit margins are holding up, helped by cost-cutting and companies extending the expected life of equipment. But these tech groups need AI services revenues, not cost cuts, to fuel the data centre boom. Find out more.
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There will be knock-on effects to all this spending. The energy requirements of data centres are vast, growing quickly and have a tendency to cluster in locations where utilities and grids are already stretched. The danger is more gas-fired power plants to feed this data beast. The tech giants, however, are rich, innovative and keen to curry favour with the public. Their appetite for renewable energy will only grow — and could help spark a renaissance for other sources of reliable clean electricity. Note that Microsoft now has a director of nuclear technologies. Read more here.
In Lex this week
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Why are the City’s top law firms falling over themselves to raise pay rates for newly qualified lawyers? The fact that US firms — with their higher fees, longer hours and smaller teams — are on the offensive in London, growing aggressively and poaching staff, is part of the story. But the “totemic” standing of the NQ rate, as proxy for firm quality, is also important here. And efforts to narrow that gap between top NQ rates in London and New York could have knock-on effects for the blue-chip law firms in the City market. Read more.
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It takes decades to build a trusted and respected brand. Losing stature happens much faster. Sports Illustrated is a cautionary tale. Authentic Brands Group bought the storied but downtrodden magazine in 2019, aiming to turn it into a lifestyle brand. It signed a licensing deal, with media name Arena Group, to publish a version of SI. The result is a federal lawsuit, the erosion of SI’s journalism and a gaudy content farm. Get the details.
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Buying into Japanese beauty products groups was once a sure-fire way to beat the market. Today the sector is underperforming in a period when the Japanese stock market is trading near record highs. Economic weakness in China, a key market for companies such as Shiseido and Kao, is one reason. Longer term, Japanese brands’ share of spending may not recover: Chinese shoppers, as in the luxury market, have increasingly been turning to homegrown brands. Find out more.
Best read
Catch up on the best read Lex pieces:
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The most valuable prize in pharmaceuticals is now the first pill that can deliver similar results to injectable weight loss medicines. Finding one that can be easily manufactured will be a challenge.
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No company has moved from an equity value of $1tn to $2tn as quickly as Nvidia. Hitting the $3tn milestone is proving more difficult.
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Private equity employs a lot of clever people. In recent times, they have applied their brainpower to avoid having to sell assets at cut-price valuations.
Lex by podcast
You can listen to Lex’s June Yoon discuss BYD and the threat of EU tariffs on the Tech Tonic podcast here. June talks to James Kynge about what BYD’s move into Europe, complete with in effect its own shipping line, means for European carmakers and policymakers.
Have a good week,
Helen Thomas
Head of Lex
Read the full article here