How are ESG mandates set to transform the SAR’s thriving data centre landscape?
It would be easy to understand why, two years ago, any of us might have predicted the spike in data usage would be temporary, as the trends that emerged with COVID-19 had just started gaining traction. The pandemic disrupted work, travel, education and socialising, and sent us all to our computer screens. But just as 5G networks took root, data usage surged with the shift to greater e-commerce, video conferencing related to work-from-home (WFH) mandates and online teaching, and streaming entertainment, and sent data centre operators on an expansion drive that shows no signs of slowing down.
That temporary spike has since become the norm. Demand for data centres and data centre space in Hong Kong is still high – and climbing. Hongkongers have adapted to flexible work hours and WFH, as have occupiers, demonstrated by the flight-to-quality for office space to meet flexi-work demands. Businesses are more tech savvy and willing to adopt new technologies than ever before, and despite the influx of new industries, Hong Kong is still a financial hub and digitalising fast.
The future of data
Hong Kong is currently home to roughly 8.6 million sq. ft. of data centre space, with 5.2 million sq. ft. due to enter the market between now and 2026. Still, that may not be enough. E-commerce penetration is growing online sales which jumped 29% in H1 2022, and so is the acceptance of fintech. New offices are purpose-built to be tech-friendly, putting even more demand on digital infrastructure.
On the policy front, Hong Kong’s relatively non-intrusive regulatory environment are a draw for investors, as is its communications hub status; Hong Kong is served by 11 data cables, more by 2025. Nonetheless, “there are two trends to note in Hong Kong,” says Bill Chan, Head of Industrial Services. “The first is that operators face a lengthy process to become fully operational, and as a result, they may need to find an alternative use for their asset with a vision to convert later.”
Operators face a lengthy process to become fully operational, and as a result, they may need to find an alternative use for their asset with a vision to convert later.
Bill Chan, Head of Industrial Services
Where and how data centres will be developed is the question. Data centres are singular beasts, with unique requirements that make it tricky to acquire land and put up a building in a few years. A stable power supply is needed, making industrial space a logical solution, “Supply is limited for industrial buildings. Good space is highly sought after, and so we're seeing record high transactions for assets in the market," Chan continues. Districts such as Kwai Chung have sites suitable for new data centres, “But to get an application approved by the government and to build the related power infrastructure could take up to six years before it’s ready for operation.”
Cold storage conversions remain an option, as with ESR Cayman’s planned conversion of Brilliant Cold Storage Tower 2 to a 40MW data centre. Scratch the surface, though, and the engineering specs for a data centre make it clear a conversion isn’t in the same leagues as converting an apartment block to a hotel. “Even when an investment site is found, there is still a lot of work to do,” says Hannah Jeong, Head of Valuation & Advisory Services. “There are very specific floor loading and ceiling height requirements, as a start. So, for an operator looking to convert, due diligence is very important.”
The impact of ESG
The second major trend should concern both investors and operators, and that's ESG. The most pressing issue facing data centre development in any form is the demand for ESG-compliant assets. We’ve already seen it in the office sector. Compliance with ESG demands for tenants, as well as emerging reporting and regulatory requirements for landlords are redefining the office sector. “Very often, these stakeholders need an asset that is ESG-compliant, or have to find a way to make it compliant,” adds Jeong. “It doesn’t come as a surprise that data centres are under pressure to be more green.”
Not long ago, CLP and ESR agreed to develop sustainable data centres and logistics facilities in Hong Kong and across the Greater Bay Area. With Hong Kong targeting 2050 for carbon neutrality, sustainable buildings are at the top of the city’s to-do list. Conversion and repurposing of existing industrial assets is all well and good, but they will also need to be retrofitted to meet modern green standards and certifications such as LEED or BEAM, which is not impossible.
ESG needs to be embedded in the entire design and decision-making process, and this starts before an investment site is even found.
Hannah Jeong, Head of Valuation & Advisory Services
“ESG needs to be embedded in the entire design and decision-making process, and this starts before an investment site is even found. At this point it’s critical to establish power usage targets and find ways to improve efficiency”, notes Jeong. In Hong Kong, due to vertical building structure, the lower power usage effectiveness (PUE) achievable is about 1.4 compared to other peer cities which can achieve 1.1-1.2,” adds Jeong. Renewable energy and innovative cooling systems will be considerations going forward, keeping data centres an attractive asset in Hong Kong. There are no easy steps to navigate this, but with the right experts, they remain a strong investment.
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