Data centres are the next big real estate asset class, and SEA is its hotspot

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Even as the prospects for commercial and residential property looked uncertain amid COVID-19, one section of Southeast Asia’s real estate sector evinced major investor attention: data centres.

Interest in data centres — spaces where internet giants store servers and other cloud-based data — surged following a sharp spike in web traffic this year as people turned to video streaming, online gaming, video conferencing, and e-commerce, amid the pandemic-induced lockdown.

So far this year, PEs, tycoons, and realtors have poured at least $6.57 billion into Southeast Asian data centre companies and facilities, DealStreetAsia data show.

Among the recent transactions is a $360 million equity investment in Singapore-based Princeton Digital Group (PDG) in October, which was led by Ontario Teachers’ Pension Plan Board. Warburg Pincus, which had invested $300 million in PDG in June 2017, re-upped in the round.

Three-year-old PDG has built around 18 data centre facilities in Singapore, Indonesia, China, and India. In 2019, the company made two acquisitions — a 70 per cent stake in five data centre facilities of the Indonesian telecom company XL Axiata, and a 100 per cent acquisition of the DCSG data centre facility in Singapore.

“We are expanding aggressively… and we are getting a lot of interest from investors, primarily because it [data centres] is one of the best asset classes from an investment perspective,” Rangu Salgame, chairman and CEO of PDG told DealStreetAsia.

Among PE funds, Australia-based Macquarie Infrastructure and Real Assets (MIRA) targets data centre investments through its Macquarie Asia Infrastructure Fund 2 (MAIF2). The fund , which hit a $3.3 billion close in 2018, was part of a consortium that acquired an 88 per cent stake in the Singapore-based AirTrunk in April. The funding round valued AirTrunk, which has data center facilities in Australia, Hong Kong and Singapore, at A$3 billion.

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SEA Data center deals (2018-2020)

YearInvestorInvesteesData Centre LocationsInvestment Size   
2020Macquarie Asia Infrastructure Fund IIAirTrunk (Headquartered in Singapore)China, Hong Kong, SingaporeA$3 billion
FigtreeDC Alliance (Headquartered in Singapore)Australia$2.75 billion
KT CorporationJasmine GroupThailand Undisclosed
Stonepeak Infrastructure PartnersDigital EdgeAsia Pacific (Japan)$1 billion
Microsoftself-ownedMalaysia6 billion ringgit
FPT self-ownedVietnamUndisclosed
Digital Realtyself-ownedSingaporeUndisclosed
Equinixfacilities owned by Mapletree Industrial TrustSingaporeS$125 million
Alibaba self-ownedIndonesia Undisclosed
Google Cloudself-ownedIndonesia Undisclosed
DCI Indonesiaself-ownedIndonesia Undisclosed
AIMSself-ownedMalaysiaUndisclosed
Ontario Teachers Pension Fund, Warburg PincusPrinceton Digital GroupSingapore, Indonesia, China, India$360 million
2019GICSpaceDC (SG HQ)Singapore, IndonesiaUndisclosed
Princeton Digital Group Data center facilities owned by XL AxiataIndonesia $100 million
Global Switchself-ownedSingaporeS$280 million
Equinixself-ownedSingapore $85 million
ST Telemedia Global Data CentresSTT Tai SengSingaporeUndisclosed
Alibaba self-ownedIndonesia Undisclosed
NTTself-ownedIndonesia $500 million
Delta Electronics andHTC-ITC (a subsidiary of Hanoi Telecom)self-ownedVietnamUndisclosed
Frasers Group, ST Telemediaself-ownedThailand S$315 million
2018Alibaba self-owned, three facilitiesIndonesia Undisclosed
Googleself-owned, third facilitySingapore$350 million
Facebookself-ownedSingapore$1.4 billion
ST Telemedia Global Data CentresSTT Loyang, self ownedSingaporeS$350 million

Among the factors fanning investor interest is the fact that data centres have been one of the best-performing asset classes globally in the last decade, particularly in the US.

California-based data centre provider Equinix, for instance, now commands a $68.81 billion market cap, compared with $3.68 billion in January 2010 — a 1,770 per cent growth. Similarly, the market cap of Digital Realty, another US-based real estate investment trust that invests in data centres, has grown from $3.9 billion to around $41.05 billion (950 per cent), in the same period.

But for private capital investing in this space, the next frontier of growth will be Asia Pacific (APAC).

By end-2021, APAC is going to be the largest data centre market in the world, bigger than North America which clocked $28 billion revenue so far in 2020, according to Salgame. “So this is the golden decade for data centres in Asia,” he said.

In the second quarter of 2020, more than $6 billion of capital was raised in APAC in joint ventures and funds that are to be deployed into logistics and data centre assets, according to data from the real estate services and investment management firm JLL. “Data centre assets, along with logistics and multi-family assets are seen to attract more interest from investors due to their resilience and growth prospects,” said Regina Lim, head of Capital Markets Research, Asia Pacific, JLL.

Asia-Pacific’s emerging economies and growing populations have led to increased data usage and a greater need for in-country computing workloads and storage, Frank Kwok, head of MIRA Asia Pacific (APAC) had said during the fund’s investment in AirTrunk.

And within the APAC region, the sweet spot is Southeast Asia, Singapore in particular.

Advantage Singapore

Singapore is the second-largest colocation (the practice of housing servers in a third-party data centre) market in Asia-Pacific with around 400 MW of critical capacity in 2019, ahead of Hong Kong (283MW) but behind Japan (827MW), according to a 2019 report by the cloud- and data centre-focused Structure Research. (Critical capacity is the power consumed by a data centre.)

Cushman & Wakefield data shows Singapore is the top destination in terms of data centre critical capacity in Southeast Asia.

As of mid-2020 there is around 286MW of data centre capacity under construction in Singapore, according to the Cushman & Wakefield report. Singapore also topped Cushman & Wakefield’s APAC data centre competitive index in 2019.

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Data Centre Competitive Index (Asia Pacific)

RankCountry
1Singapore
2Hong Kong
3South Korea
4Malaysia
5Australia
6China
7Thailand
8Japan
9Vietnam
10India
11Indonesia
Source: Cushman & Wakefield

“A stable political environment, robust network connectivity, and world-class infrastructure has ensured that the attractiveness of Singapore as a global data centre market has evolved substantially,” said Bob Tan, senior director, Alternatives, Capital Markets, APAC at JLL.

The global interest in Singapore became evident in 2018 when Facebook announced plans to build a $1 billion data centre facility. In the same year, Google announced that it would invest $350m for its data centre in the city-state.

They joined a list of other data centre players building facilities in the country including Equinix, Digital Realty, Japan’s NTT Communications, Indonesia’s Telin as well as local players like Keppel Data Center, Singtel, Starhub, and ST Telemedia.

Room for more

Along with Singapore, the entire Southeast Asia market has more room to grow data centre capacity.

SEA’s digital economy is forecast to grow to $240 billion in 2025, and data centres are the backbone of this growth, Darren Hawkins, CEO of SpaceDC, had said in a statement in June 2019 when his company partnered with Singapore’s sovereign wealth fund GIC to develop a data centre campus in Jakarta.

The Cushman & Wakefield report predicted a CAGR of 13 per cent for the Southeast Asia data centre market in 2019-24.

Southeast Asia is also expected to be the fastest-growing place (12.2 per cent CAGR) for co-location data centres, where equipment, space, and bandwidth are rented out.

SEA’s data centre market is now 13 per cent of APAC’s total market size, said a spokesperson for Digital Realty. The driver is mainly the region’s demographic — the youngest population in Asia — as well as some of the fastest-growing e-commerce markets in the world such as Indonesia. “We foresee data centre investments increasing in Southeast Asia as more businesses expand into the region and drive further demand for a robust IT infrastructure,” the spokesperson said.

Indonesia notes high economic growth as well as mobile users that make it a very exciting market, said PDG’s Salgame. Countries like Malaysia and Thailand also have high GDP growth, high per capita GDP, and growing consumer spending, which will drive a lot of cloud services and data centre businesses. “We see Southeast Asia as a very robust growth market across the spectrum,” he added.

Cloud providers such as Google, Amazon Web Services (AWS), and Alibaba are showing an increased interest in opening cloud centres in the region. The adoption of cloud-based services will be a key driver for the market in the next few years, along with the increasing internet penetration, according to a ReportLinker report.

Challenges

The growth, however, has spawned new challenges. Data centres are extremely power-hungry facilities, for instance.

Singapore’s colocation data centres are projected to consume 600 MW of IT power — more than 4 per cent of the country’s total generation capacity of 13,700 MW — by the middle of next year, according to Datacentre Dynamics, which tracks the sector.

Concerns over the carbon footprint of data centres are understood to have led to a moratorium on new facilities in Singapore — a signatory of the Paris Climate Agreement — that could last until 2021, says Datacentre Dynamics.

The government may pause all new data centre approvals while new efficiencies related to power consumption and managing carbon emissions are reviewed and implemented, said JLL’s Tan.

Recently, the Singapore government pushed a deal between Facebook and clean energy provider Sunseap to instal solar panels on more than 1,200 public housing rooftops. “This will act as a catalyst for other data centre operators to think in that direction,” Tan added.

Singapore-based DC Alliance says its data centre expansion in the country will be through collaboration with existing operators. “We wouldn’t rule out being in Singapore, however, with the moratorium in place there is no opportunity for data centre development in the country,” said the firm’s marketing communications director James Wong.

Expansion in Southeast Asia outside Singapore may be challenging, too, due to infrastructure challenges.

Indonesia’s Telkom, which has 22 facilities in Indonesia and one in Singapore, is exploring opportunities for data centres outside Jakarta in Tier-III cities. Here, it may face trouble in ensuring uninterrupted electricity supply, Andi Setiawan, VP investor relations, Telkom Indonesia said. The cost to data centre operators for an hour of downtime is $260,000, Information Technology Intelligence Consulting estimated in 2018.

Investing into data centre companies or facilities will require a longer investment horizon for private capital. “An average horizon is about five to seven years, it is the minimum that they would want to hold. And typically for better returns, they would wait even longer,” said Salgame.

Yet, despite the longer wait “the return on investment is still going to be higher… a lot will happen,” he said.

Singapore Reporter/s

In Singapore, we are looking to double our reporting team by this year-end to comprehensively cover the fast-moving world of funded startups and VC, PE & M&A deals. We want reporters who can tell our readers what is really happening in these sectors and why it matters to markets, companies and consumers. The ability to write precisely and urgently is crucial for these roles. Ideal candidates must have to ability to work in a collaborative, dynamic, and fast-changing environment. We want our new hires to be digitally savvy and ready to experiment with new forms of storytelling. Most importantly, we are looking for hard-hitting reporters who work well in a team. Collaboration and collegiality are a must.

Following vacancies can be applied for (only in Singapore).

Following vacancies can be applied for (only in Singapore).   

  • A reporter to track companies/startups that have raised private capital, and have the potential to become unicorns. SEA currently has over 40 companies with a valuation of over $100 million and under $1 billion.
  • A reporter who can get behind the scenes and reveal how funding rounds are put together, or why they’ve failed to materialise. She/he in this role will largely focus on long-format stories. 
  • A journalist to track special situations funds, distressed debt and private credit (from the PE angle) across Asia.

Singapore Reporter/s

In Singapore, we are looking to double our reporting team by this year-end to comprehensively cover the fast-moving world of funded startups and VC, PE & M&A deals. We want reporters who can tell our readers what is really happening in these sectors and why it matters to markets, companies and consumers. The ability to write precisely and urgently is crucial for these roles. Ideal candidates must have to ability to work in a collaborative, dynamic, and fast-changing environment. We want our new hires to be digitally savvy and ready to experiment with new forms of storytelling. Most importantly, we are looking for hard-hitting reporters who work well in a team. Collaboration and collegiality are a must.

Following vacancies can be applied for (only in Singapore).

Following vacancies can be applied for (only in Singapore).   

  • A reporter to track companies/startups that have raised private capital, and have the potential to become unicorns. SEA currently has over 40 companies with a valuation of over $100 million and under $1 billion.
  • A reporter who can get behind the scenes and reveal how funding rounds are put together, or why they’ve failed to materialise. She/he in this role will largely focus on long-format stories. 
  • A journalist to track special situations funds, distressed debt and private credit (from the PE angle) across Asia.