Investment Trends in APAC Data Centre Markets

WRITTEN BY: RAMESH NAIR CEO & Country Head JLL - India

Data centre: High growth in APAC to attract more investments

One industry that withstood the pandemic was the data centre industry as it serviced the data-driven economy across the globe. The positive sentiments were also reflected in the performance of listed REITs in the US markets. The REITs of office space was down 24%, retail was negative 36%, hotels were down by 49%, while industrial was up 2.3% and Data Centre was up 19%. This highlights the strong interest of both Data centre operators and investors.

The Data centre industry in APAC continues to be on high growth with few qualified operators. Those with the ability to scale-up have been attracting high valuations. The pandemic was not a significant tailwind, as the industry growth has been driven by increasing cloud adoption and data storage since last few years.

Investment strategies and valuation play

The industry has been attracting high valuations due to large capital chasing a few players with core competencies and ability to scale up across regions. Businesses with the ability to build scale in the post pandemic scenario will get differentiated very quickly.

Sales and leaseback have one of the fastest ways to enter a new market, but to be successful one should be able to create more value from the asset. This can be achieved by making technological changes suited for the local customers, adding global customers and increase utilisation levels. Telecom carve-out is a transformation play to meet third-party demands depending on the market. The operator has to adopt a three-way strategy of combination, carve-outs, and greenfield which is required for building a multi-country platform. In this process, a speculative built up strategy could work in a scenario of increasing demand as scaling time would lead to missing on opportunities. Investments in Built-To-Suit (BTS) model for hyperscale operator are expected to give single-digit returns, whereas an operator would earn higher return because of the business risk and operational risk.

India Data centre industry landscape

Data is one of the largest and fastest-growing commodities and India is leapfrogging in this field. However, there has been a lag in enabling infrastructure development like cable landing stations, technology and networks. Government, both at the state and Central level are enacting legislation which will address the concerns as well as give a further boost to the sector. The growth prospects have led to a surge in supply pipeline which may find it challenging to keep its promise on time and quality. The entire ecosystem from developer, operator and other service provider needs to be in place if India has to establish itself as the data centre leader. 

Indian colocation industry is expected to add ~700 MW during 2020-25 as per JLL Research. Apart from this committed supply, additional additions backed by new investments are expected. Most operators are adopting a land banking strategy for scalability. The adjusted land cost (FSI of 1.5 to 2.2) based on hyperscale design is around INR 1500 psf while the construction cost of the shell (building) is around  INR 2800-5000 based on the design. So the overall hyperscale data centre built cost ranges from USD 200-400 psf while the MEP cost ranges from US 5-5.5 mn.

Warehousing and Data centre: comparing speculative builds

Speculative builds in data centres exist where hyperscalers have committed 50-60% space as it is expected that the tenant would eventually take up the rest as demand has been outstripping supply. In Warehousing, though similar scenario exists, the built-up dollar cost in data centres is much higher than warehousing space, hence not comparable. Data centre trends in APAC indicates that demand has been over stripping supply leading to tighter markets. The firm pricing trends in the market across APAC indicates that there is not much speculative build as perceived. However, rush of many players in the space may lead to competitive pricing in future.

In data centres, technology, innovation and sustainability would be the key differentiator going ahead. Players will have to create niche in their areas based on customer requirements and technological innovations. Large hyperscale customers who aim to carbon neutral or carbon negative will be looking at operators who provide sustainable energy alternatives. The green energy approach will occupy centre-stage and those who can provide this solution will be preferred.

Sustainability trends

The concept of sustainability is not just limited to the renewable power supply but is applicable across the value chain. It starts from sustainable building material, design, construction, energy efficiency etc. Apart from PUE which focuses on power efficiency, the backup power has to be sourced from renewable energy, unlike the current dependence on fossil fuels. Going ahead, countries with the advantage of the land and renewable power will not only have data corridor but renewable power supply corridor running undersea providing green power to countries with scarce resources.

Data is the largest and fastest-growing commodity and trends in technology, sustainability and legislations will define the next wave of growth.