Future-Readiness Key to Investing in Japan, Korea Data Centres: MTD TV

Preparing for evolving customer requirements is key to ensuring profitability for digital infrastructure investments in Japan and Korea as the industry adapts to rapid adoption of cloud and AI, according to Diarmid Massey, CEO of data centres for HKEX-listed industrial specialist ESR.

Speaking on Thursday at Mingtiandi’s 2024 Data Centre Forum, which was sponsored by Yardi, Massey pointed to the importance of designing power and cooling systems which can be adapted to changing needs, and to choosing locations which can serve varying client bases as tenant requirements evolve.

“We’re building a data centre which needs to come online in three years time and be useful for multiple years after that,” said Massey. “We need to make sure that we’re designing very flexible solutions for power, weight loading, cooling and location to some extent.”

Massey, who was appearing in the panel along with Phillipa Weber, director of business development for Gaw Capital Partners’ internet data centre platform, and Jingwen Ong, APAC research manager at data provider DC Byte, added that, “As we start to see AI solutions coming out…we need to ensure that the data centres we’re building and delivering are flexible enough that they cater for the evolution of these cloud deployments, let alone what are we going to do with the large language models.”

95% Occupancy

Favourable supply and demand dynamics in Japan, which ranks as the largest market in Asia Pacific by operational capacity with 1.4 gigawatts of capacity according to DC Byte, have led to occupancy rates of as high as 95 percent in the Greater Tokyo area, with Osaka also seeing declining vacancy, according to Ong.

While developers are facing rising construction costs as Japan grapples with a shortage of general contractors, rapid increases in data centre leasing rates in response to rising demand are allowing investors to pass along these higher fees to tenants, according to Weber. The executive pointed to Japan as one of Gaw Capital’s favorite markets, with the Hong Kong-based private equity firm, which has deployed $3.4 billion in Japan to date, including $1.4 billion this year, anticipating additional data centre investments in the country.

“I don’t actually think you have any issues with selling anywhere in Tokyo if you have space inventory online,” said Weber. “I look at the rental prices for (Gaw’s western Tokyo campus) and I strongly believe due to the construction costs going up, that the end customer will end up paying a little bit of a higher price to be able to get a good location within the Tokyo central region, especially when AI is starting to get deployed. There is a strong pipeline.”

Tight vacancy in Japan has also been exacerbated by challenges in rolling out new projects amid power constraints as data centre developers face wait times for access to the power grid of as long as half of a decade, according to Massey.

“What we found is that if someone’s applying for power today, they probably won’t get that power delivered for another four to five years,” Massey said. “It’s a challenge that we all need to be aware of as an industry, which is you need to get dedicated power, you need to get it confirmed early in the project, and you need to be sure of your timeline, build to it and set your customer and investor expectations accordingly. Because at the end of the day, without data and without power, it’s not a data centre.”

Power Impact Assessments

Growing demand from users of social media, gaming, streaming and other segments is also providing opportunities for data centre investors in South Korea, with user requirements ramping up at the same time that new supply has been curtailed by recent government restrictions on power access for data centre projects in the Greater Seoul area.

“(The Korean government) implemented new power regulations about three to four months ago that basically require all of the new data centre developments in the Greater Seoul area to undergo a power impact assessment,” said Ong. “You are required to acquire the land before the power impact assessment…the requirements are really strict, and that’s killed a lot of new projects that are trying to enter the Seoul market. So right now the growth is going to be coming entirely from everyone who’s had something going on before these power regulations.”

With supply limited and demand rising, monthly data centre rents in Korea have surged to levels comparable to Japan at around $130 to $140 per kilowatt per month from $80 to $110 within the past few years, according to Ong.

These rising rents, along with a promising long-term outlook for the sector, have helped boost valuations for Korean digital infrastructure assets, with ESR continuing to eye opportunities in the market.

“I think the challenges have always been there and yet the demand is increasing,” said Massey. “And we’re seeing opportunities in the market. We’re seeing stabilised assets coming to the market and being resold at a good cap rate, at a good return for investors. So I think the opportunity still exists for investors there.”

With ESR last year having sold a Seoul-area data centre leased to Korea’s SK Broadband, Massey sees the liquidity of the country’s data market as appealing to investors.

“With the transactions going on in the market, it’s fairly well defined. And that allows some sort of certainty on cap rates and returns for future investors, to at least have some comfort that the assets that are being developed have value going forward. And so I think it’s actually still a really positive market.”