Keppel: Asia is ‘ready to leap forward’ on data center development

With a huge runway for growth driven by AI, the hyperscale campus format is the future, explain Keppel’s Wai Meng Wong and Hwee Long Loh.

This article is sponsored by Keppel Corporation

Global asset manager and operator Keppel Corporation is focusing on three segments: infrastructure, real estate and connectivity. The connectivity segment includes data centers and is led by Wai Meng Wong, data centers chief executive officer. The data centers arm has two main product areas: private equities and a data center REIT, which is managed by Hwee Long Loh, CEO of Keppel DC REIT.

Wong and Loh say it was important to create a platform that gives investors access to differentiated data center products that feature sustainable power generation, network connectivity, as well as best-in-class future-proof designs, and that the opportunities in the sector are very different in Asia compared with those in Western markets.

In what ways are Asian markets different to the West?

Wai Meng Wong

Wai Meng Wong: Every economy in the world is seeking to digitalize simultaneously and this is leading to a massive surge in global demand, so international comparisons are very relevant.

Every country in Asia-Pacific is different and it is wrong to apply the same assumptions to their different circumstances. It is in general a more difficult region to operate in than the West, but then difficulty is what we like. Western markets are more developed, whereas there can be more challenges in Asia, but with those challenges come opportunities, both for Keppel and for investors in the funds and REIT we manage.

The relative immaturity of Asian markets provides one key advantage; the West is saddled with legacy infrastructure which may not be able to deliver the amount of power necessary in the new digitalized world, whereas Asia is better placed to make the leap forward.

Hwee Long Loh

Hwee Long Loh: The demographics are also more positive in Asian markets. Demand potential can be enormous. For instance, Indonesia, with its more than 200 million population comprising a large percentage of young IT-literate individuals, presents an immense market opportunity and it is not even the largest market in the region. Asia has a lot more growth potential in this sector as it is in the earlier phase of market development, so it is natural to be more excited about it.

On the other hand, Western markets offer more developed, stable conditions and have more mature data center markets.

Does that mean data centers in Asia may be overvalued?

WMW: A few may be. But the crucial point is that not all data centers are created equal. There are many different types of data centers and different investment vehicles have evolved to reflect that.

The key factor for pricing is demand growth. This remains high in Tier 1 cities across the region. The opportunities may be even greater in some Tier 2 cities, albeit with greater risk. The key is having the right product in the right market, at the right location.

HLL: It is true a lot of people are very interested in the potential of data centers, which is also driven by technological trends like artificial intelligence. This, combined with the scarcity of opportunities, has created an increasingly competitive market. As a result, despite the current rising interest rate environment, we see cap rates in Asia holding firm generally, and in some core markets even compressing.

What are the prospects for hyperscale operations in Asia?

WMW: This has been the big development in the evolution of the market. Hyperscale data centers require particular skills and there are operational challenges around the costs and power demands of a campus environment designed to suit every customer’s needs. Power capacity must be there, which means more risks, and this also has a technical impact on the IRR calculations, which are so important for developers.

But the hyperscale market has a huge runway for growth, particularly with the development of AI. This will be the biggest factor in hyperscale campus facility growth in the future.

That growth also means deals are getting bigger – not in the sense of square footage, but in terms of megawatts. This is due to technology improving hugely over the last few years, which has enabled facilities to grow in size and scale.

HLL: The scalability point is very important. The ability to not only build bigger, but more efficiently and sustainably, will be critical in the future when size really will matter with AI workloads.

Can bigger still mean greener? How important is sustainability for data center investors in Asia?

WMW: Data centers are of course major consumers of power and that has environmental consequences that have to be taken into account. Asia is, to some extent, behind Europe in terms of sustainability, but it is catching up fast and there is no question it is moving in the same direction.

Investors are very aware of sustainability issues. To some extent this is driven by multinational customers and their demands for sustainable solutions. Beyond environmental considerations, multinational customers also look at other aspects, such as diversity, equity and inclusion.

In addition, there is homegrown enthusiasm for sustainability, especially here at Keppel. Sustainability is very much in our DNA; we have grown up in a country where the scarcity of land and water has made us highly aware of environmental factors. This drives us towards being particularly innovative in finding sustainable solutions.

What would be an example of this innovation?

WMW: It is in part about reducing power consumption. There are many ways in which you can manage the energy consumption of data centers and we have been very innovative in cooling systems and in the efficiency of design.

But there is no question that the real solution is to take the green challenge head on. This means being innovative not just by reducing power consumption but also ensuring that the power comes from a sustainable source.

In this regard, our dialogue with our colleagues in Keppel’s infrastructure division is very important as we seek to see how renewable power can help make data centers more efficient and green. Keppel is uniquely placed as we are also a forerunner in the renewable energy space in Singapore.

For example, Keppel is the first in Singapore to import renewable energy from Laos, and the first in Singapore to receive a conditional approval issued by the Energy Market Authority of Singapore for the long-term import and sales of 1GW of low-carbon electricity from renewable energy sources.

Keppel is also developing Singapore’s first hydrogen-ready 600MW power plant. The synergy between our different business units enables Keppel to create a competitive edge as we have access to low-carbon electricity.

In addition, as a developer of quality data centers over the past 10 years, we can also operate data centers more efficiently by leveraging artificial intelligence and applying best practices to the data centers that we operate.

One of our innovations in this area is our DataPark+, which aims to unlock the power of low-carbon energy at scale and use seawater for cooling so as to eliminate use of treated water. It will also comprise floating data center modules to extend its capacity beyond the available land area. Living in a country which is only a few feet above sea level we are very aware of the vulnerability to climate change.

This all sounds very positive. What are the biggest risks for investors in data centers in Asia?

HLL: Asia is a collection of very diverse economies where each has its own unique intricacies. To remain ahead of the curve, it is thus important to work with parties that can bring forth strong local networks and relationships, a good understanding of local contexts and strong operational capabilities in data centers and its adjacent businesses like renewable energy and cable networks to be able to access proprietary dealflows. This is a proposition that Keppel is uniquely positioned to deliver.

WMW: I think some platforms are struggling short-term. They have made the mistake of simply applying an infrastructure or real estate mindset to investing in data centers. You need to have a much better grasp of the technology involved and make that central to your investment strategy.

We have to remember the customers here are the large US and Chinese tech companies. You have to really be able to understand what you need to deliver to meet their ever-changing needs. If you do not have that knowledge, then this is really a very big risk.

Having worked with the biggest five cloud players in the world, Keppel is in a good position to develop data centers that meet their needs. Furthermore, Keppel has a strong Asian presence, which has helped us to source for new opportunities in markets that are growing.

Over the long term, the outlook for data centers in Asia-Pacific really is very positive.

What is your view on the outlook for China?

HLL: The scope for data centers in China, even on a standalone basis, is tremendous due to its large population base and extensive internet adoption. We see continued potential for exponential domestic demand growth driven by domestic players like Alibaba, Tencent, Bytedance and Meituan.

One challenge that China faces is in relation to the global chip shortage, which may be more delicate for them to manage in view of the current geopolitical situation. As an asset manager, we also have to be cognizant of the increasingly multi-polar world in our portfolio diversification considerations.

WMW: International trade is an issue. Investors must keep a very close watch on the geopolitical risks which come from the tension between the US and China. But behind the scenes, China and the US still need to transact with each other and in this regard, we are in a good position in Singapore to be a neutral platform that sits between East and West and can do business with both sides.

There are also positive consequences of the rivalry. As the arms race in AI escalates between them, we expect considerable calls for hyperscale operations in China.