Hong Kong Dominates with 54% of APAC Data Centre Investments in 2020

Data centre investment in Asia-Pacific climbed to $5.7 billion (HK$44 billion) between 2018 and 2020, a seven-fold increase over the growth recorded over the previous two year interval, according to new research by Cushman & Wakefield in Hong Kong.

In the first eight months of 2020, and despite an ongoing public health crisis, nearly $1.5 billion was poured into data centres in APAC, 56 percent of 2019’s total. Investment into Hong Kong accounted for 54 percent of the commitments APAC-wide.

“The growing importance of Internet of Things (IoT) applications, the impending 5G network, and fast adoption rates of cloud computing as well as the post-COVID-19 ‘new’ normal are the four major factors driving the surge in demand for cloud storage,” said Cushman & Wakefield’s Associate Director of Research, Hong Kong, Eric Chong in a statement Monday.

CBRE agreed, placing Hong Kong in the middle of the pack among 23 APAC cities on its market recovery index, with Tokyo, Singapore and Sydney, in its Asia Pacific Real Estate Market Outlook 2020 Mid-Year Review. According to CBRE, data centres are currently considered Hong Kong’s prime investment assets (alongside core Grand A offices and logistics properties). Perhaps not surprisingly C&W singled out those same cities as prime data centre locations.

Hong Kong Rack Space Stays Tight

In the second quarter of 2020, Hong Kong had 7.9 million square feet of data centre stock, 80 percent of it controlled by just 10 operators, including SUNeVision and PCCW Solutions, together accounting for 31 percent of the market.

Representation from international operators, with Japan’s NTT Communications and UK-based Global Switch playing the biggest roles, is expected to increase in the short term due to pre-commitments, with 4.2 million square feet of new supply due in the next four years.

Among the international data centre platforms active in the city, however, all but US-based Equinix and OneAsia are owner-operators, with the dominance of both global and local investors investing in facilities for their own use potentially leaving little supply for third party tenants hoping to lease space or secure co-location services, according to C&W’s analysts.

“Despite a 50 percent increase over the existing 7.9 million square feet [of] stock, supply will remain tight as 82 percent of the upcoming developments have already been taken up by owner-operators and tenant operators,” explained Chong.

International Players Expand Footprints

In July, China Mobile made one of the city’s largest data centre investments of the year when it agreed to acquire a 789,000-square-foot (73,300 square metre) Fotan site for HK$5.6 billion. The mainland telecom giant paid a record-setting HK$5,967 per square foot for the New Territories data centre plot and outbid its most aggressive competitor by over 50 percent in the process, according to public records.

That tender set a price point nearly 25 percent higher than from previous data centre site benchmarks, including SUNeVision’s December 2018 purchase of a 1.2 million square foot parcel in Tseung Kwan O for HK$5.46 billion — a price equivalent to approximately HK$4,500 per square foot which set a record at the time.

In July, US data centre giant Digital Realty announced that it would begin work on its second facility in Hong Kong, adding a 24 megawatt carrier neutral facility in the Kwai Chung area to an existing property in Tseung Kwan O.

Infrastructure, Political Risks Cloud Local Outlook

Hong Kong holds appeal for data centre operators for its low taxes and utility costs, marginal climate risks, sufficient fibre connectivity (its server capacity increased to 379.6 MW in March) and market maturity. In addition the government incentivises data centre development by waiving land premiums for IT&T operators; with the China Mobile sale including such a clause. As expected, Hong Kong was received low marks for land costs in C&W’s data centre research report.

Hong Kong’s data centre tenants are currently dominated by finance, insurance, real estate and  business services firms (with 90 percent of these FIREBS occupiers using cloud systems) and telecom operators, though global cloud services providers such as Microsoft Azure, Google Cloud, and Alibaba Cloud, are likely to be the major drivers in the future.

But one disadvantage to data centre investment in Hong Kong is the city’s current power supply, which falls short of the demands of forthcoming hyperscale data centres. It can take up to four years to install new power infrastructure, and that needs to get faster if the city expects to keep pace with regional neighbours theorised C&W.

In addition, international operators could be reduced in the long term by concerns over the National Security Law imposed on Hong Kong in July, although Cushman’s team indicated that data centre investors, so far this year, seem unperturbed by changes in the political climate.

“In recent months, we have continued to see strong interest from international investors exploring opportunities in the Hong Kong data center market,” C&W’s Hong Kong chief John Siu said. “Data center operators are also aggressively pursuing leasing and purchasing opportunities to meet the strong demand for rack spaces from enterprises.”