Coinciding with the macroeconomic jitters in the region, important demographic changes such as rapid urbanization and proliferation of e-commerce make it an opportune time to be investing in Asia’s other niche asset classes. Data centers remain a largely untapped sector in Asia, even as student housing and retirement homes are beginning to draw investments.
That could soon change. Both in terms of market fundamentals and demographics, it is the right time to be taking a first-mover advantage by investing in data centers via closed-ended funds, joint venture partnerships with developers, and real estate investment trusts (REITS). In its annual Asia Pacific market outlook for 2016, CBRE has also cited structural investment-themed opportunities in the sector as a point of focus this year.
Last month, Alpha Investment Partners, the Singapore-based fund management platform of Keppel Corporation, announced the launch of a $500 million closed-ended data center fund, one of the first blind-pool vehicles in Asia to specifically target the asset class. Keppel already has the expertise and technical capability, given its successful data center REIT that was listed on the Singapore stock exchange in 2014. The Keppel DC REIT, comprising nine data centers across Asia Pacific and Europe, was valued at $1.07 billion as of December last year.
Experts in this sector say the elaborate costs and expertise involved in building the technical infrastructure for a data center is a common dissuading factor for many investors. The minimum investment amount needed is usually around $300 million. In markets like Hong Kong, there is a lack of investible stock. Many of the quality data centers here are owned by large telecommunication companies, and with longer lease terms and general supply constraints in the property market, there is little incentive to bring in institutional capital.
Yet one also needs to weigh the benefits against the costs. According to several property brokers, investing in data centers in more mature markets such as Singapore will currently yield 8 percent to 10 percent in returns, a far cry from the 3.5 percent to 4 percent that can be yielded from core office properties in gateway markets. If a data center asset in a fund is sold to one of the increasing number of data center REITs being listed in Asia, a cap rate of around 6.5 percent could be generated from the deal, resulting in overall returns of around 18 percent to
20 percent, according to a Singapore-based fund manager.
In January, for instance, Bangkok-based property developer Country Group Developments sold a 24,700 square foot data center asset in London at a 15 percent IRR to its Thailand industrial REIT.
A data center is usually let to data-service providers and telecommunication companies for a minimum period of 10 years. The long lease terms and contractual rental rate increase thus provides a stable income stream, making it an attractive investment for institutional investors such as pension funds and sovereign wealth funds. Additionally, in what is an important draw for the Middle Eastern investors, data centers are Sharia-compliant.
Ongoing macro trends in Asia, including the meteoric rise of internet data traffic, e-commerce and cloud computing, will continue to fuel demand for data centers. Data creation and storage needs are estimated to be currently growing at a compounded annual growth rate of 48 percent.
Many markets in Asia stand to gain from this demand. According to an article in AsiaOne, the annual absorption per square feet of data center facilities in Singapore grew at a compound annual growth rate of 30 percent from 2008 to 2015, and is expected to continue a double-digit growth. This is despite a 47 percent increase (by megawatt) in the supply of such facilities expected to hit the market by end of this year, the report said.
There are also markets such as Thailand where there are practically no data centers, except for the ones run by the government.
As for investors that do not have the capital to develop a data center, they could look at acquiring industrial properties that have access to power and therefore can be repositioned and let to data center operators.
Investing in data centers undoubtedly requires enhanced specialized knowledge arguably, more so than other niche sectors such as student housing and care homes, but if investors can power through the challenges, the reward would be well worth the risk in Asia.