Goodman Group, Australia's largest property developer, has made a remarkable leap in 2023, driven by a strategic focus on data-centre development. This move comes in response to the soaring demand for such facilities, largely fueled by the rapid growth in artificial intelligence applications. As a result, Goodman's stock price has surged by an impressive 45.8% this year, marking its best performance since 2006 and making it the top performer on the Australian real estate index.

The company's focus on data centres aligns with a global trend where major technology players, known as "hyperscalers"—including giants like Amazon, Microsoft, and Meta—are heavily investing in infrastructure to meet the increasing demands of AI services. Although Goodman has not specified its customers, it is well-known for serving some of these industry leaders.

Australia's data-centre market, while still developing, has captured significant investment attention. This year alone saw significant investments, such as Blackstone's acquisition of AirTrunk for A$24 billion and developer NEXTDC's substantial capital raise of nearly A$4.6 billion through equity and debt offerings.

At the end of September, data centres under construction comprised 42% of Goodman's A$12.8 billion portfolio of projects under development. This is a notable increase from 37% at the end of the previous year, reflecting the growing importance of data centres in Goodman's overall strategy.

John Lockton, head of investment strategy at Sandstone Insights, points out that the heightened exposure to data centres is a key factor driving investors' willingness to pay higher multiples for Goodman. Lockton remains optimistic about the company's future, noting the momentum in data-centre investments. He anticipates ongoing growth for the company in the coming years, supported by the capital expenditure outlook of hyperscalers.

However, not all market analysts are convinced the trend will continue indefinitely. Concerns are emerging about potential overheating in the data-centre sector. Some market segments have noted a cooling investor interest in data-centre-specific stocks as valuations increase. This sentiment is illustrated by the recent IPO of DigiCo Infrastructure REIT, which, despite raising A$2 billion, saw its stock dip 9% upon debut.

Winky Yingqi Tan, a Morningstar analyst, considers Goodman's securities to be expensive at current valuations and warns against assuming long-term excess returns from data-centre investments. Tan highlights risks such as potential obsolescence of data centres requiring costly upgrades and the risk of increased supply from competitors affecting Goodman's returns in the future.

While debates continue among analysts, Lockton remains confident in Goodman's prospects. He praises Goodman's strong project pipeline and the crucial land access with power supply necessary for data-centre conversion—a resource that many competitors find challenging to secure.

Goodman Group's data-centre emphasis showcases its adaptability in a rapidly evolving market, and its success story will be closely watched by investors and industry peers alike. As technology needs grow, the company's strategic choices will play a defining role in its future trajectory.