Bank of England probes speculative data center financing amid AI debt boom

What the BOE is digging into

The Bank of England has been sounding out market participants on data center projects that move ahead without an occupier locked in to pay rent. People familiar with the review say it is part of a broader look at how the industry is being financed.

In property lending, backing construction before a tenant agrees to lease is called speculative financing. One person said the BOE is not opposed to that approach in principle, even though it is widely seen as risky. The BOE declined to comment.

The risk picture regulators see

The inquiry sits within the BOE's wider focus on AI-related finance. After rapid expansion in the sector, the supervisor began examining data center lending last year due to worries about the interdependence among firms involved. Last month, the central bank's Financial Policy Committee cautioned that AI-linked investments' "increasing leverage, opacity and, at times, 'circular arrangements' that can be associated with this financing could complicate the assessment of risks and could amplify losses if expectations disappointed."

Market nerves over the heavy borrowing needed for AI have flared in recent weeks, and there are signs some investors are turning away from weaker projects. The Bank for International Settlements recently cautioned that opaque deal terms - especially when hyperscalers lease facilities on long contracts with exit options - can raise the danger that the same asset ends up pledged multiple times.

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Who is lending, who is not

According to last month's Bayes UK report on commercial real estate lending, four lenders had halted new loans to data centers, and it noted that owners of poorly located or lower quality sites are struggling to secure appropriate credit.

Projects and bottlenecks to watch

Data centers are viewed as a potential driver of UK growth, but local pushback and long waits for power connections are slowing builds. Blackstone Inc., the private-equity behemoth, is spearheading a £10 billion (13.5 billion dollars) data center development in the north east of England. Google has opened a facility on London's outskirts as part of a £5 billion UK investment. And this week, Brookfield Asset Management and the Qatar Investment Authority committed £2.5 billion (3.4 billion dollars) to a data center project with Drax Group Plc.

Why it matters for your portfolio

Regulators are mapping a fast-growing credit web around AI infrastructure, while surveys show some banks stepping back and debt funds stepping in. That mix can influence which projects get financed, how risks are shared, and how resilient cash flows tied to long-dated leases really are if expectations fall short.

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