A sudden hush seems to have befallen the market for data centres, a coveted asset class since 2019. Investors now seem to be less interested. Some people speculated the national security law might have had something to do with it. But, don't write off the market or Hong Kong, just yet.
Data centres were a highly sought-after asset class, especially during Covid-19, as the unexpected surge in e-commerce, work-from-home regime and demand for online entertainment in the form of video and game streaming, especially in the 5G era, sent operators scrambling for space.
The current lull has little to do with the security law. The cause is the misguided perception that the market is facing a surge in supply over the next few years.
The city now has about 8.6 million sq. ft. of data centre space. An additional 5.2 million sq. ft. is due to be ready between 2022 and 2026. This deluge is at the heart of potential operators' caution, as they assess how long it will take for data centres to sell their racks.
Investors, who will own the core-and-shell buildings leased by operators, need to know that only 12% of this new wave of supply will be for letting, while the bulk of that will be absorbed by owner-operators.
For example, China Mobile (1 million sq. ft.), Sunevision (1.2 million sq. ft.) and GDS (500,000 sq. ft.) are developing sites for their own use. Much of the remaining space has been pre-leased, with only 630,000 sq. ft. for tenants.
The pressure is more on operators as they need to sell their racks to hyperscale or wholesale users, such as cloud companies and retail users. As a result, we expect demand to slacken a bit more because of competition among operators until 2026.
The city still offers excellent opportunities. In the long run, there will be a favourable supply-demand gap. Based on Colliers' in-house analysis, the city is likely to face a minimum shortage of 300 megawatts by 2030, given the sharp growth in hyperscale and media-content businesses.
It has a population of 7.5 million compared to Singapore's 6 million and Sydney's 5 million. But Hong Kong's per capita supply of 360MW lags behind Singapore and Sydney's 415MW.
Importantly, the local "market" is more commercial than those in Singapore and first-tier mainland cities. Singapore set the policy in stone for new data centres by limiting land and power supply, whereas mainland cities have stringent controls on licences needed to run theirs.
Despite the relatively higher cost of real estate, Hong Kong has a low degree of government policy intervention which somewhat protects investors' interests. The application process for power supply is also transparent.
While it is true that other parts of the Greater Bay Area may also offer opportunities to investors, opaque local government systems leave project results in doubt, which investors will see as an added risk. Hong Kong's approach is more agile and flexible by allowing buildings to be refurbished into data centres.
Furthermore, Hong Kong is a global finance hub and financial institutions demand that customer data is kept within its territory. Currently, the financial sector is responsible for 21% of the data centre usage in Hong Kong, and it will remain a major player as the city expands.
Hong Kong has 11 marine data cables connecting internationally, making it a global data hub. More will be installed by 2025.
Still, Hong Kong isn't without its drawbacks. Land supply is minimal, rents are three times those of Singapore or Sydney, and refurbishing existing buildings is costly because high-rise properties need a lot of work to conform to data centre standards.
Investors will also need to be aware of potential Hong Kong Science and Technology Parks' data centre supply for operators' self-use. This may drain potential operators from the market.
Looking ahead, solid initiatives on the front of environment, social and governance values are driving data centres to shrink their carbon footprint as sustainability has become a critical factor.
Investors and operators must improve their efficiency, targeting a lower power usage effectiveness to remain competitive. Further considerations would be renewable energy, seawater cooling systems and finding ways to mitigate carbon and heat emissions.
The article was published on South China Morning Post on 14 September 2021.