Colocation, Hyperscale or Build-to-Suit: Structuring a Data Centre Investment in Kenya

Kenya’s data centre sector is drawing serious capital, and the Communications Authority’s September 2026 proposal for a standalone Data Centre licence signals that regulators are trying to keep pace. Before signing a lease, a land agreement or a construction contract, an investor needs to decide which of three commercial models it is actually building: colocation, hyperscale, or build-to-suit. That choice drives who holds the licence, who carries the land and power risk, and how the deal is structured.

The Three Models and Who Holds the Licence

In a colocation deal, an existing licensed operator leases rack space, power and cooling to enterprise customers inside a facility it owns and runs. The customer never touches Kenyan telecoms or data centre licensing directly, it simply contracts for capacity. In a hyperscale build, the investor becomes the operator: it acquires or leases the land, constructs the facility, and is the entity that must hold the relevant licence and deal directly with the Communications Authority, county planning authorities and the Energy and Petroleum Regulatory Authority. Build-to-suit sits between the two, a developer constructs a facility to a named tenant’s specification, then either leases it back to that tenant or sells it on completion, with the licensing and land questions depending on who ends up operating the finished building.

Kenya’s Proposed Standalone Data Centre Licence

Data centres currently sit under the Network Facilities Provider Tier 2 category, a classification built for telecoms infrastructure rather than colocation halls. On its own assessment, the Communications Authority considers this an over-application of NFP requirements to operators who “do not transmit signals, assign or use spectrum, or provide subscriber-facing services.” Its September 2026 consultation proposes carving data centres out into their own licence category, with an application fee of KShs 5,000, an initial fee of KShs 100,000, an annual operating fee of KShs 80,000 or 0.4% of gross turnover (whichever is higher), and a 15-year term. The consultation window runs 30 days from publication, so an investor structuring a Kenyan facility now should factor in the likelihood that the licensing basis for whichever model it chooses will change before construction finishes. We cover the full regulatory and compliance picture, including data localisation and NEMA approval, in our Data Centres and Digital Infrastructure Investment guide; this article focuses specifically on how the choice of commercial model shapes the deal.

Land Tenure: The 99-Year Ceiling for Non-Citizen Investors

Article 65 of the Constitution restricts non-citizens, including a company that is not wholly citizen-owned, to leasehold land tenure only, and caps any such lease at 99 years regardless of what the granting document says. For a hyperscale build where the investor is acquiring land directly, this is not a minor drafting point, it sets the outer limit of the security of tenure available and should be reflected in how the investment’s depreciation and exit assumptions are modelled. A colocation customer avoids this question entirely, since it never holds an interest in the underlying land. A build-to-suit investor needs to check which side of the transaction actually takes title or the head lease, because that is the party the 99-year ceiling binds.

Special Economic Zone Status: A Narrower Incentive Than It Used To Be

The Special Economic Zones Act defines an “information communication technology park” as an eligible zone type, and a data centre can in principle be licensed as an SEZ enterprise, developer or operator within one. What changed under the Business Laws (Amendment) Act 2024 is that the incentives and tax benefits available to an SEZ developer, operator or enterprise are now capped at ten years from the date of the licence, where previously the benefit period was not fixed in the same way. The 2024 amendment also gives the Cabinet Secretary power to set a minimum investment threshold for an area to be declared a special economic zone, and introduces a separate SEZ service permit for a business that wants to operate within a zone without claiming the tax incentives at all. A hyperscale investor evaluating SEZ status needs to model the ten-year clock against its own payback period, an incentive that expires before the facility has depreciated is worth less than the headline rate suggests. A colocation customer leasing space inside someone else’s SEZ-licensed facility does not need to run this analysis itself, though it should ask its landlord whether the facility’s own SEZ status affects the services being supplied to it.

Power and the Build-Versus-Buy Decision

A hyperscale operator generating or contracting its own power at scale will typically need an Energy and Petroleum Regulatory Authority licence or exemption depending on capacity, and will negotiate its own power purchase arrangements with Kenya Power or an independent producer. A colocation customer contracts for power as part of its service agreement with the operator, and its real exposure is not licensing but the strength of the uptime and redundancy commitments in that contract, which we cover in our companion piece on colocation contracts and what enterprise customers should negotiate.