Data centres in Asia Pacific are expected to maintain their industry-leading growth, but investors should be aware of a host of challenges that come with the territory, according to a panel of experts interviewed on MTD TV’s data centre series today.
The cloud server facilities have blossomed into a prime asset during the COVID-19 pandemic, particularly in the APAC region. Equinix, a global leader in the sector, forecasts that cloud and IT services in Asia Pacific will grow at a compound annual rate of 50 percent through 2022, dwarfing other geographies. But the surge is also a continuation of shifting use of data services started many years ago.
“5G is around the corner, and that’s only going to drive additional consumption of data,” said Michael Shang, managing director for Blackstone in Hong Kong. “That will require additional investment in the data centre space.”
From Niche to Mainstream
Before 2020, public perception of data centres was that of an alternative asset: a niche but growing sector driven by increasing digitisation, internet usage and demand from hyperscalers like Google, Tencent, Amazon and Alibaba. Now the COVID-19 pandemic is shifting the cloud conversion into the mainstream, especially in China, according to the speakers at the event sponsored by Yardi Systems.
“The [pandemic] made it visible, but the sector has been growing for quite a while,” Shang said. “There’s 21Vianet, Chindata, GDS and a lot of global players, so they’ve been laying the foundation for quite a long time. I think COVID brought forward into everyone’s view the importance of internet and connectivity, and it’s going to continue to pump capital into the sector because demand is going to be massive.”
Shang, who led Blackstone’s $150 million investment in NASDAQ-listed 21Vianet earlier this year, noted that the level of investment in cloud infrastructure in APAC is currently half that of the US. With Alibaba and Tencent signalling further investment in cloud services in the next five years, “there’s a lot more to come”, he said.
Data centres have gained enough traction to lure major funds and investors into the fold. In addition to Blackstone’s deal, Bain Capital arranged the $540 million IPO of Chindata in September, and in late October, Goldman Sachs announced it had invested $500 million in Global Compute Infrastructure with an eye to creating a global data centre portfolio.
Initiatives Lead to Opportunity
Investment opportunity is gaining momentum in lockstep with data centre growth, raising the question of whether there is more capital than opportunity.
Investment incentives for facilities like data centres did not exist in China pre-COVID, and investment was tightly controlled. New policies this year, particularly the Ministry of Industry and Information Technology’s May directive to support the development of industrial big data centres nationwide, are now bringing more capital to the sector.
As with other government-supported sectors on the mainland, this encouragement is creating both opportunities and challenges, chiefly in supply and demand dynamics. Demand is obvious to Tammy Tang, Colliers International’s Shanghai-based managing director for China. She estimates that while consumer data usage is growing 25 percent a year in China, capital flow into data centres is surging by up to 70 percent annually.
“What I’m seeing is a huge imbalance between supply and demand in the market,” she said, “and that will be a factor in a couple of years when all these newly built centres are being utilised. Data centre prices have not increased. There are challenges ahead of us.”
Actis partner Thomas Liu, who led the fund manager’s investment in mainland China start-up Chayora, as well as recently spearheading a new joint venture near Seoul, sees capacity in some Asian markets still lagging behind more developed locations. Liu pointed out that per capita data centre power capacity in the US is approximately 15 megawatts, while in South Korea it’s three megawatts and in China just one megawatt per person.
“Those are two super-connected economies with high internet penetration,” he said of his company’s bets on China and Korea. “There’s a lot of room to grow. What’s concerning with COVID is the Chinese government providing policy support, which means new capital and financing support as well.”
New players with fresh access to capital are driving up prices as they bid for assets and land. “But that’s always the case in China,” Liu said. “We see this as a short-term capital supply imbalance.”
Looks Can Deceive
To date, private equity and infrastructure investors have dominated the data centre space, putting real estate investors on a steep learning curve. When compared with logistics investment, data centres are far more complex and throw up more barriers to entry.
“Of all the sectors I’m handling right now, I would say logistics is the easiest one, with the least risk,” said Tang, a former GDS executive. “Data centres are the most difficult. The operation, design capacity, specialisation, specifications, permitting, licensing make everything more difficult.”
Deal structure is also key. “There’s no one way to do it,” Shang said. “Whether you back a team, start from scratch or invest in a publicly listed company, it’s about making sure the [operator] is well suited to the geography they’re in.”
Skill on the ground is what Shang and Blackstone considered first. Blackstone opted to invest in an operator, 21Vianet, that had been public for many years, had a proven track record and understood local regulations.
For Actis, which took a $180 million majority stake in China-focused data centre developer Chayora in 2019, the key to any investment is owning hard assets. But this is made challenging by an industry still in the early stages of development, and where mature assets are generally not for sale.
“If you want to own a portfolio of assets, you do have to build from scratch,” Liu said. “Even in mature markets like South Korea, that’s the case; you’re certainly not buying assets from SK. If you want to own a portfolio of assets, that’s the only way to go.”
The Road Ahead
Going forward, underserved markets will play a larger role in data centre investment, with policy having a growing influence. While continuing their China efforts, Actis and Blackstone are also looking at opportunities in India and emerging markets in Southeast Asia in 2021.
“Policy varies from jurisdiction to jurisdiction,” said Baker McKenzie partner Edwin Wong, who recently advised Gaw Capital on its $1.3 billion China data centre fund.
Japan remains relatively easy from a restrictions perspective, while geopolitics will impact China and potentially locations like Vietnam.
“But there are issues beyond investment restrictions — access to power, access to land — and those regulations change,” Wong said. “Those pose the real barriers to entry.”