Data centre owners and operators in Asia Pacific (APAC) are increasingly making the move to leased structures as investment in the sector grows at a faster pace than markets in Europe and the United States.
According to JLL Australia’s Head of Industrial, Michael Fenton, as operators aim to deploy capital to fund data centre expansions, the sale and leaseback structure will become popular. Sale and leaseback involves the owner and end-user of a data centre selling its facility to another entity and leasing back the requisite amount of data centre space from the new owner. Such arrangements allow the owner or operator to unlock hidden equity on the organisation’s balance sheet and is the quickest way to raise money yet retain a property for operational use.
“The huge Capex and ongoing maintenance required often results in long-term, triple net lease structures, providing investors with secure long-term cash flows with a minimal amount of ongoing property management resources,” explains Fenton.
APAC’s data centre market is expected to expand at a compound annual rate of around 14 percent through the next four years, according to research by Technavio. Based on estimates by PricewaterhouseCoopers (PwC), the nearly US$10 billion market is anticipated to exceed that of Europe by 2021 as data consumption within the region increases by an estimated 30 to 60 percent per annum between 2015 and 2020.
Such growth was brought about by the rise of rich media and digital solutions which, in turn, led to heightened digital connectivity and consumption of these technologies by consumers; hence, the need for dedicated data centres.
“A surge in broadband connectivity and smartphone users will drive demand as people change their patterns of media consumption and the adoption of social media,” says Fenton.
Another catalyst for the expected boom is the increasing number of businesses that leverage big data analytics to drive growth. Data centre operators that are currently dominating region’s markets include Equinex, Digital Realty, Global Switch, China Telecom, and Singtel, as well as major real estate investors such as Keppel REIT DC, Mapletree, Ascendas, and Goodman.
According to the Technavio research, over 50 percent of small- and medium-sized businesses in Southeast Asia are expected to adopt cloud-based services by 2020. The construction of new data centres is increasing at a rapid rate in the region as telecommunication and government agencies play major roles in cultivating growth, it says.
Fenton also noted that at present, the primary data centre markets in the Asia Pacific region include Japan, China, Hong Kong, India, Singapore, and Australia, with Indonesia seen as an emerging hub.
At twice the size of the next largest market in the region, Japan is the biggest data centre market in Asia Pacific, sitting at US$6 billion in 2015, according to PwC.
Meanwhile, China’s data centre market is projected to undergo the fastest absolute growth, with an expected US$1.2 billion added per annum between 2015 and 2022.
The PwC study also showed that the data centre market in Indonesia is on track for a 35 percent compound annual growth rate, making it the fastest growing in the region in percentage terms. Expansion in the sector has been driven by factors including population size, digital connectivity, security, political landscape, and government regulations. For instance, Indonesian banks are required to store all their data domestically by the end of this year, says Fenton.
Other examples of how government regulations have helped shape the market include Singapore’s Personal Data Protection Act (PDPA), which restricts outbound data transfer. While, in China, municipal governments are providing tax breaks and incentives to promote the construction of data centres as part of a country-wide initiative of building cloud-computing capabilities.
Indeed, for service providers, attractive growth opportunities lie ahead in the data centre market. As for real estate investors, it is not only important to evaluate the risks and returns involved, but also weigh the best market entry strategy in a given prospective economy, says Fenton.