Emerging as one of the top few alternative investment sectors in Asia Pacific, data centre demand is, undoubtedly, tethered to our reliance on the internet and organisations’ exigent need for data storage and management.
Exponential increase in mobile and internet penetration by individuals, paired with the increased adoption of cloud computing, has created an unprecedented demand for data centres. Also weaved into the demand equation for data centre is the growing application of Internet of Things (IoT), Artificial Intelligence, 5G and Big Data. In other words, the more information there is, the more need there is to store it.
Here in Asia Pacific, data centre demand has largely been fuelled by large, global tech and cloud companies from the U.S and China, which has intensified the demand for data centre land use and development. The key markets in this region are Singapore, Hong Kong, Tokyo, and Sydney although we are seeing increasing interest in Jakarta, Korea, India and China. While the key markets face limited supply and high land pricing, emerging markets have presented more opportunities in terms of land space and governmental incentivisation of land acquisition.
Data centres differ to other real estate investment classes and there are challenges involved:
New Asset Class
Data centres are somewhat unchartered territory for investors and the market has yet to see a full market cycle. What this means is that there is a lack of comparables for investors to benchmark investments in this sector. It is also opaque, posing challenges for valuation. Despite seeing a number of M&A deals executed at significant levels , the multiples realised cannot be compared with that of asset level yields as they often reflect multiple asset acquisition and strategic premiums.
The capital intensive nature of the sector is a strong barrier of entry for many investors. With this limitation there are only a handful of investors who would be able to participate on a solo basis at these levels. Further, investors may have to accept a longer investment horizon due to high capital expenditure.
Data centres are specialised assets that service customers with strict technological, mechanical and environmental requirements. The mechanical and electrical infrastructure dictate profitability, so it must be well designed and maintained to ensure optimal operation and efficiency. This requires expertise which go beyond typical competencies, and this region currently faces a dearth of talent.
Scarcity of opportunities
High quality data centre assets and sites are scarce and competition is steep when one becomes available. This is especially true in land scarce Hong Kong. In December 2018, the last 50 year leasehold greenfield data centre site in Hong Kong sold for US$700million, reflecting US$580 per sq ft on allowable GFA.
In Tokyo, opportunities are limited by power availability to sites. It takes some 40 months to secure power from the authorities. In Singapore, stricter requirements for securing government approvals for data centre use serve as an obstacle. In Sydney, industrial development land shortage reduces suitable data centre sites.
As we move through the market cycle and the data centre investment market continues to populate, investors will have to bring more than capital to the table.
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