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How SUNeVision’s court win may affect HK’s data-centre sector

Hong Kong CVAS 20220810 data center 1536x1040

If HKSTP decides to act against any lessees who might contradict the terms of the lease, it might not be so simple to relocate

 
The Court of Appeal’s ruling in favour of SUNeVision’s bid for a judicial review of what it claims is the Hong Kong Science and Technology Parks Corporation’s responsibility to enforce its own lease restrictions may have ramifications for the data centre industry in Hong Kong.  

SUNeVision is a subsidiary of Sun Hung Kai, which is engaged in the data business. Initially, the company wanted a judicial review so HKSTP would react to their comments about data-centre operators in the Tseung Kwan O Industrial Estate, which they claim were leasing space from the Parks and, in turn, subletting that space to third parties. That bid failed in the court of first instance in 2018, with the appeal ruling in SUNeVision’s favour, released in late June 2022. Essentially, the ruling says that HKSTP must respond to SUNeVision. 


"Essentially, the ruling says that HKSTP must respond to SUNeVision..."


Looking at the issue from SUNeVision’s point of view, it is not hard to see why they want this to be addressed. If companies could use HKSTP land to profit, it would put data centres outside the park at a disadvantage, unable to enjoy the more robust profit margins that would come with lower land costs.  

It appears that all HKSTP needs to do is tell SUNeVision that it has reviewed its leases, and all is in order, and that would be the end of it. What the case has done, however, is spotlight a possible laxity in leasing arrangements. This grey area concerns whether a first occupier leasing cabinets / racks to a third party is considered “self-use”.

Now the issue is back in the spotlight. If SUNeVision is correct, the Parks might enforce the policy more stringently. This could create further demand in the private data-centre market if tenants are in breach of their contracts. 

Data centres are already in high demand in Hong Kong, given the city’s status as an international finance centre and the rise of e-commerce, 5 G and content streaming services. Currently, only 8.5 million sq. ft. of data centre space is available in the city.  

Data centres’ specific requirements – a reliable, reasonably priced power supply and space to house the components that would put them among the higher tiered centres – are not easily found, given the city’s dire shortage of land. More than 5.5 million sq. ft. of new supply has been scheduled by 2026, but less than 4% of that is available for new tenants.  

The next sizeable data centre to come online will be the Singaporean giant Mapletree’s in 2023, on the site in Fanling that it won in January 2021. The government has not earmarked any land for industrial use in the 2022-2023 sales programme.


"HKSTP gets its land at a cheaper rate from the government and passes that saving on to its first lessees who bid for the land, build their own centre, and operate it for self-use."


The private sector pays more than HK$9,000 per sq. ft. on the total area for data-centre land and development costs. HKSTP gets its land at a cheaper rate from the government and passes that saving on to its first lessees, who bid for the land, build their own centre, and operate it for self-use.  
Hong Kong’s current end-user rack rate is around US$250 per kilowatt. But even if end users go to a company inside the Parks, for example, Global Switch, NTT or Digital Realty, they would have to pay a similar rate. 

Previously, a SUNeVision subsidiary had bid for one of the Parks’ sites, working on the assumption that it could not let cabinets for profit, which restricted the amount it bid for the tender. The land went to global data-centre provider Global Switch, and the SUNeVision subsidiary bought land nearby that was substantially more expensive.  

Other data operators submitted bids on the idea that they could lease out cabinet space for profit. In the company’s press release and subsequent media coverage, SUNeVision said they would have been far more generous with their bid if they had known running the business for profit was an option. 

In 2017, then SUNeVision CEO Peter Yan King-shun raised the issue, telling the media, “The government stated clearly that subletting of the premises to other parties was not allowed, but I don’t see that the problem has been solved. There are companies subletting spaces for profit. I am not saying all operators in the estate are subletting spaces. The data centres of HSBC and the Hong Kong exchange are for their own use".   


"Few lessees would want to commit to the expense of constructing a data centre, which could take up to 6 years before operational, that they will only be able to use for less than a quarter century."


But a second, perhaps more critical, issue has also been highlighted. The HKSTP’s lease has only 25 more years to run as it is due to expire in 2047. Few lessees would want to commit to the expense of constructing a data centre, which could take up to six years before operational, that they will only be able to use for less than a quarter century. It also alerts current occupiers to the fact that they should be thinking of long-term solutions.  

HKSTP can take steps to bolster confidence among potential and future occupiers by seeking to extend its lease for a further 50-year term. A 75-year term, coupled with cheaper land on a prime site, would be an irresistible drawcard for lease renewals and new tenants. 

This whole saga shows that data centres are still in high demand. Investors would do well to watch this space as potentially more tenants will be looking for private space eventually.


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Hannah Jeong

Head of Valuation & Advisory Services

Valuation & Advisory Services

Hong Kong

Hannah Jeong has extensive valuation & advisory services experience over 15 years including property investment and development projects specialising in valuation, development consultancy, financial analysis and feasibility studies. Project’s geographic coverage span across Asia Pacific and Middle East, in particular Hong Kong, China and Korea. She has started her career with Colliers since 2006 and is now heading our Valuation and Advisory Services - Hong Kong Office with over 40 professionals.

Hannah has strong client coverage on major financial institutions including global real estate funds and private equity firms.

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