Investors increasingly put their store in data centres amid rapid growth in cloud services
As yields and returns in traditional real estate get squeezed, investors are looking at alternative asset classes
The startling growth in cloud services and China’s booming e-commerce sector has fuelled a boom in data centres on the mainland and Hong Kong, making them increasingly popular with Asian investors as an “alternative real estate asset class”, according to a report by global law firm White & Case.
Data centres are part of a growing group of alternative real estate asset classes such as logistics, student housing and co-living spaces that are steadily gaining popularity compared to traditional commercial, residential and mixed-use units.
“It is widely reported that 90 per cent of the world’s data was created in the last two years, which gives you an idea of the growth in the area,” said James Dodsworth, head of global real estate at White & Case and author of the report. “As yields and returns in traditional real estate are becoming increasingly hard to come by, investors are looking at alternative asset classes to drive returns.”
This asset class has found favour with real estate private equity and sovereign wealth funds from around the world in the past few years. Between 2014 and 2017, there were 24 merger and acquisition deals involving data centres in Asia worth over US$4 billion, according to the report.
“Data centres continue to grow in relevance as an alternative asset class, both globally and in Greater China,” said Scott Davies, principal on the real estate assets team at global asset management firm Hamilton Lane. “Institutional investors have more and more options to gain exposure to data centres, including via increasingly abundant data centre-specific funds,” adding that traditional real estate and infrastructure funds are also allocating more capital towards data centres.
However, Dodsworth warned that data centres were very capital-intensive “so there’s quite a high barrier to entry in that you have to invest a lot of money and perhaps have a longer timeline in developing the income stream and customer base before you have a stabilised asset.
John Siu, managing director of Cushman & Wakefield, said in December that the unparalleled growth of e-commerce in China will benefit Hong Kong and fuel demand for data centres in the city.
With online retail sales in China reaching a staggering US$307 billion in the first quarter of 2018, according to government figures, the potential for growth in data centres is huge. Research firm IDC has predicted that global spending on cloud services and infrastructure will reach US$277 billion by 2021.
Chinese e-commerce powerhouse Alibaba Group Holding launched its first data centre in Hong Kong in 2014, housing its cloud computing arm Alibaba Cloud, as part of an aggressive international roll-out of new data centres in locations including Germany, Australia, Japan and the United Arab Emirates. Alibaba Cloud provides cloud services, including data storage to online businesses and Alibaba’s own e-commerce platforms. Alibaba owns the South China Morning Post.
Hong Kong is also home to data centres run by telecoms providers China Unicom and PCCW. In December, UK-based Global Switch opened the city’s largest data centre, a 470,000 square foot facility in Tseung Kwan O Industrial Estate built at a cost of US$640 million. It counts China Telecom Global as one of its tenants.
Last year, Apple partnered with a state-backed developer to establish its first Chinese data centre in the rural western province of Guizhou, to comply with tightened cybersecurity laws. The US technology giant also announced plans to build a second data centre for iCloud services in Ulanqab, Inner Mongolia, which is expected to start operating in 2020.
Despite growing demand, the fast-developing sector faces challenges in China and Hong Kong due to the extortionate amount of capital needed to operate them, as well as difficulties in finding a secure enough location for housing business-critical infrastructure.
“Data centres are large consumers of power, and that power needs to be considerable and uninterrupted,” said Dodsworth, adding that firms tend to avoid areas likely to be affected by natural disasters, near industrial or chemical facilities that might be a fire hazard, and sometimes even aircraft flight paths.
Besides, investment in data centres still lags behind the lucrative logistics sector in Asia as ambitious e-commerce retailers look to expand across the region. In the past month, major Chinese e-retailer JD.com spent over US$420 million to acquire stakes in two Asian logistics companies, China Logistics Property Holdings and ESR.