Can the national security law dim a rare bright spot in Hong Kong’s property market?

Data centres in Hong Kong represent one of the most attractive segments in Asia-Pacific’s property market, given the city’s strong infrastructure network and status as a top financial hub. Could the exit of TikTok and, potentially, other social media operators dim that allure?

Critics argue that Hong Kong’s standing is at risk as the national security law stoked concerns among technology companies about the impact on users’ privacy. Proponents contend that the city’s competitive advantages are hard to beat, backed by improving sentiment.

About 30 per cent of Asia-Pacific investors indicated they were likely to pour more money into data-centre assets this year, according to a CBRE survey of 610 respondents conducted from December last year to February this year. That is up from 18 per cent in a similar survey taken in 2019, it added.

“To ensure the performance and speed of transmission, the data will still be needed to be domiciled here,” said Jing Zhou, director of advisory and transaction services for data centre solutions for the region at CBRE. “Hong Kong remains a competitive market given its digital ecosystem and rich network infrastructure are hard to replicate and replace.”

Data centres are secure, temperature-controlled facilities equipped with multiple power sources and high-bandwidth internet connections. These purpose-built facilities are used by enterprises to remotely store large amounts of data, manage business applications and host cloud computing operations.

The segment’s performance is a rare positive in Hong Kong’s property market, which has been hamstrung for months by social unrest and the coronavirus pandemic, contributing to the city’s deepest recession on record earlier this year. The asset’s resilience has also prompted developers to look at rejuvenating or converting industrial land or buildings for better yields.

The national security law has stoked immediate concerns about data privacy among some of the world’s biggest technology companies, as the legislation gives mainland authorities broad powers, including electronic surveillance in the city.

TikTok, the popular short-video app owned by ByteDance, pulled out of Hong Kong earlier this month. Facebook, Google, and Twitter have also said they were suspending cooperation with Hong Kong authorities on users' data requests to assess the legal implications.

Hong Kong has been an ideal location for data centres because of its proximity to mainland China, free flow of information with no censorship and adequate protection of data privacy, among its advantages, said Maggie Hu, an associate professor of real estate and finance at the Chinese University of Hong Kong.

“The security law certainly has an impact on the data centre segment because people will wonder whether data privacy and free flow of information would, to some extent, be undermined for national security purposes,” she said.

“Most companies would choose to diversify their data centre locations to navigate through the risks posed for their businesses in the presence of geopolitical tension and national security law. It would not be surprising to see them delaying their expansion until the full impact of the national security law is discerned,” Hu added.

Hong Kong is deemed as a Tier 1 market for data centres in the region, according to CBRE’s ranking. Markets in Hong Kong, Australia, Singapore and Tokyo saw their IT capacity expand by 14 to 76 per cent in the second quarter from the preceding three months, it added.

Hong Kong data centres represent a good investment opportunity

The classification is based on data market size and maturity, the presence of international occupiers, efficient power infrastructure, transparent government policy, an established data regularly framework, and competitive transaction practices.

In the US, data centres have been one of the best performers among real estate investment trusts, handing investors 19.3 per cent returns in the first five months this year, according to CBRE.

Hong Kong has more than 11 submarine cables that connect globally with six to seven more scheduled in the next three years, according to Colliers Hong Kong. This is a significant advantage over other cities aspiring to usurp the city.

“Mainland Chinese companies are also utilising Hong Kong data centres for their offshore data storage as Hong Kong is in a unique position to accommodate both international and China demand,” said Hannah Jeong, head of valuation and advisory services at Colliers.

The digitisation of business and online consumption of products and content will continue to grow, she said, adding that the trends are “politically neutral.”

China Mobile outbids Hong Kong tycoons, Singapore rival with record price for Sha Tin industrial land in sign of market revival

This growth in the sector has also led to 4 million sq ft of space either being leased or transacted for development in the last 24 months, according to CBRE. Another 1.8 million sq ft of supply could be added over the next three years, Colliers estimates.

Data centres yield between 3.5 and 5 per cent on average in Hong Kong, according to Colliers, superior than other segments of the local property market, it said. Rentals are expected to increase 4.2 per cent in 2020 and over 5 per cent in 2021. The government’s sale of an industrial site in Sha Tin to China Mobile for a record price underlines the confidence in the market, Jeong said.