Without sufficient land supply, can Hong Kong maintain its status as a data centre hub?

Land scarcity is a major threat to Hong Kong’s booming data centre industry and its status as a regional hub, according to Sunevision Holdings, the technology arm of Sun Hung Kai Properties.

The city’s data centre market is projected to increase from US$705.5 million in 2016 to US$1.5 billion in 2021, a five-year compound annual growth rate of 16 per cent, according to Structure Research, an independent research and consulting firm focusing on the internet infrastructure – cloud and data centres – market.

But Raymond Tong Kwok-kong, chief executive of Sunevision, the biggest data centre landlord in Hong Kong, said that a shortage of land could significantly impact the scalability, sustainability and cost-effectiveness of a data centre provider as well as the whole industry in the long run.

Sunevision owns five data centres, giving it an 18 per cent market share – the highest in Hong Kong, according to Colliers.

His fears are not misplaced: a study commissioned by the Planning Department in January 2017 showed that there is likely to be a land shortfall of 17.4 hectares for specialised industrial use, such as science parks and R&D facilities of information technology companies, up to 2041.

A Cushman & Wakefield report last year ranked regional rival Singapore ahead of South Korea and Hong Kong as the top location for operation of data centres, thanks to its network infrastructure, connectivity to major Asia-Pacific markets, pro-business environment and political stability.

James Siu, deputy managing director at Savills, said that because Singapore relies on government housing there is less demand for private residential land than Hong Kong, which means more land can be allocated for industrial use, including data centres.

“[Besides], residential land [in Hong Kong] is more popular among developers than data centres as they have a long payback period,” said Siu.

Hong Kong’s race with Singapore to be Asia’s data centre hub gets another leg up

Sunevision’s Tong said that because land and space are limited in Hong Kong, there is much more competition.

Sunevision splashed out HK$5.46 billion (US$697 million) or HK$4,509 per sq ft this month for a data centre parcel in Tseung Kwan O that can accommodate a building with a maximum gross floor area of 1.2 million sq ft. The price was 45 per cent higher than the upper limit of valuation and four times more than that of a similar site in the area.

Tong said the acquisition price was reasonable.

“It would generate strategic synergy effect with the adjacent MEGA Plus, and also MEGA-i and MEGA Two in the MEGA Campus, that would only further strengthen our market leadership position,” he said.

“The new data centre will be our [most] significant expansion in the coming years,” said Tong. “It will be a remarkable addition [that will] enable us to stay ahead in the data centre market in the region.”

Despite the dire land scarcity, Tong insisted that Hong Kong remained a “recognised regional hub” of data centre services, citing the low risk of natural disasters and high ranking in digital security and personal safety.

How one of China’s poorest provinces is morphing into a world-class hi-tech hub

The government, too, has taken note of the difficulties facing in the sector and has tried to ease land shortages. In the past two years it has made available through tender three hectares of data centre land parcels and waived fees for owners of industrial buildings who want to change its use to data centres.

But Savills’ Siu said the government’s efforts making more land available through tender was inadequate as he felt it had come a bit too late and the conversion of old industrial buildings in Tsuen Wan and Kwai Chung into data centres did not fit the needs of operators.

Against these shortcomings, it will be very difficult for Hong Kong to compete against Singapore or any other regional rival.