Asia's data centre and infrastructure market is expanding at a rip-roaring pace, with new facilities opening and a surge of regional and international asset owner money keen to take advantage. The asset sector looks set to continue to surge, as China, Korea and other countries see more assets become available. 

According to a CBRE report published in June, 30% of Asian respondents said they intend to invest in data centres, up from 18% in 2019. And the International Energy Agency predicts that China will lead Asia to possess more data centres than North America by next year.

China is leading the expansion. Research from Hong Kong-based real estate private equity firm Gaw Capital shows the country's data centre market size grew 10 times to Rmb128 billion ($19.11 billion) between 2010 and 2018. That was an annual rate of 37%, double that of the global sector over the period.

The potential of the region's asset class is leading several regional property managers to launch new fund vehicles, to capitalise on the demand.Christina Gaw, head of capital markets at Gaw Capital, told AsianInvestor her company plans to launch a second IDC (internet data centre) fund buying data centres across Asia outside China.

Christina Gaw, Gaw Capital

“Korea Japan, Vietnam, Malaysia Indonesia are all relevant target regions,” she said, declining to give details about when the fund would launch or how large it would be.

Igis Asset Management is another keen player. Joseph Lee co-chief executive and president of the Korean property fund manager, told AsianInvestor his firm launched a $150 million fund in September to purchase hyperscale data centres in the Seoul metropolitan area, targeting yields of above 6% and a net internal rate of return (IRR) of above 15%.

The fund marks Igis’s first foray into the sector, and it has gained backing from investors that include several US pension funds and domestic Korean institutional investors. Lee said the fund has already purchased one site to develop into a data centre and is currently looking at several more deals.

He added that the fund was a precursor of a large fund it was planning to launch hopefully next year but said the target markets or structure of the fund had not yet been finalised.

“We are currently working on another transaction to deploy our existing capital, with a view to launch a larger vehicle next, although we have not finalised this plan,” he said.

SOARING DEMAND

The appeal of data centre assets has led their valuations and investment returns to sharply rise. 

It is a little tricky to estimate the potential investment returns from Asia data centres, as they lack track record as a distinct asset class in Asia. However, it's worth noting that US data centre Reits have returned 25.9% for the year to date to early October according to Nareit, the US Reit industry body.

Private equity buyers are currently fairly comfortable with the increased prices.
Spencer Park, Dechert

“There is a sense that, particularly in Asia, this market will grow at a faster pace than [investors] can keep up,” said Spencer Park of law firm Dechert in Hong Kong. "Private equity funds want to build digital infrastructure platforms [combining] data centres, optical fibre networks, 5G connectivity infrastructure and other infrastructure needed to get data to consumers and businesses.”

Indeed, there has been a rapid increase in supply and acquisitions across Asia, including Japan, Korea, China, Malaysia and Vietnam.

Research from Real Capital Analytics (RCA) for AsianInvestor recorded investor flows of $4.68 billion into technology, telecom and data centre deals that are either completed or in the pipeline and due to complete this year, of which $3.7 billion is coming from within Asia.

If all pipeline deals complete this level would exceed the combined $4.41 billion combined deal total of the prior three years, and would be more than three times total 2019 volumes.

China alone has seen investor flows into completed deals of $1.47 billion so far in 2020, with a further $710 million due to complete before the end of the year. The next largest share of flows has been Japan ($500 million, combined completed and pipeline), followed by India ($470 million) and then Singapore ($400 million).

Ben Chow of Real Capital Analytics in Singapore, told AsianInvestor that data centre deals have been heavily focused on China, where developers such as Global Data Solutions favour a capital light development strategy, working in partnership with investors and seeking to divest their assets as soon as possible.

In August 2019 GDS partnered with Singaporean sovereign wealth fund GIC in an agreement whereby GDS sells 90% equity interest in data centres to GIC after they have been built.

Ben Chow,
Real Capital Analytics

Deals are less common in Japan, where most developers are self-financed and reluctant to sell the centres they develop because they see prices increasing: “Their model is more build and hold: especially now they want to hold on to their stock,” said Chow.  

Park said that he had seen an uptick in deal origination over the past few weeks among Korean investors, international private equity companies and corporates, with parties keen to complete transactions in the fourth quarter. The move marks a shift for investors in the country, who had earlier stopped pursuing real estate transactions almost entirely, as a result of Covid.

“Data centres are a crossover between operational assets and real estate, so both real estate [investors] and corporates are getting involved. Digital infrastructure deals are the low hanging fruit across Asia that all investors are interested in,” Park told AsianInvestor.

Gaw argued that it is particularly important to choose the right operator to maximise returns, particularly when it comes to hyperscale centres.

“Hyperscale needs a lot of operational expertise. It requires high level of technical knowledge; the operator has to be strong for a [major] technology company to lease [the data centre]," she said.

Park added that operators play as important a role in introducing investors to potential deals as they do providing expertise in running data centres. The industry remains fragmented and operating companies are vying to emerge as the industry leaders, such as in the US, where CenturyLink and Equinex own a large share of the market.

“In Asia it is still quite a diversified space,” he said.