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Data centers: What corporates and investors need to know

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According to a report by PWC in 2016, Asia Pacific’s primary and emerging data center markets were evaluated at US$12 billion. This is expected to grow by 27 percent per annum, meaning that it will exceed the European data center market in size by 2021.

This podcast brings together Paul Dwyer, JLL’s Regional Data Center Lead, and Bob Tan, Alternative Investments Director to discuss the trends for corporate occupiers looking to improve their data center strategy, as well as investors looking for the best returns in this increasingly popular alternative asset class.

Podcast Transcript

Paul Dwyer: Hi. I’m Paul Dwyer and I’m the regional data center lead here at JLL and you’re listening to the Future of Work podcast where we bring you interesting commentary, new ideas and in depth research for the world of real estate. Today we’re going to be talking about data centers from a corporate occupier’s perspective and also the investment opportunities that lie within.

So to quickly introduce myself, I’ve been working at the data centers sector in Asia Pacific for five years and I’m based in Hong Kong. Joining me today is Bob Tan, Alternatives Investment Director here at JLL. He looks after data centers from an investment perspective and he’s based in Singapore. Bob has been working at the data center space also for five years.

Bob Tan: Hi everyone. That’s right Paul. I’ve been around the data center Market for what feels like forever now, but my main focus is looking after the investment aspects of the Data Center sector.

Paul Dwyer: Fantastic. Great to have you here. I want to just set the scene for the conversations today. According to a report by PWC in 2016, Asia Pacific’s primary and emerging data center markets were evaluated at US$12 billion. It’s expected to grow by 27 percent per annum. This will mean that it will exceed the European data center market in size by 2021. So let me know if you’re getting the same feedback from investors here, Bob, but I’ve be getting a lot of queries from corporate clients in Singapore and Hong Kong data center markets.

Bob Tan: Yeah, that’s right Paul. Generally I agree. We’ve been getting a lot more enquiries from potential investors asking about opportunities in the Asia Pacific over the last couple of years. And Singapore and Hong Kong definitely feature quite strongly on their radar, but of course, that extends to Tokyo, Sydney and other emerging markets to a certain extent.

But putting the question back to you, Paul, as you have exposure to many of the data center markets in Asia Pacific; Singapore and Hong Kong are located quite closely and they’re compared on many array of different topics. So what do you think are the main similarities and differences across the two markets?

Paul Dwyer: Sure. I guess when it comes to anything in society at all, Hong Kong and Singapore compete head to head and that’s in all walks of life and are extremely competitive with their offerings. The similarities between the two are the fact that they are two of the more progressive data center markets in the region. They probably provide the most attractions for deployments into Asia Pacific from particularly the US. They are banking and finance powerhouses so there’s a certainly a need and a want from large corporate occupiers to be there.

A lot of headquartered staff at Asia Pacific are either in Hong Kong or in Singapore. So there’s a lot of synergies between the two. But in terms of the actual markets? They’re quite polar opposites. Singapore and Hong Kong, going back maybe four or five years were considered to be equals and were quite competitive at a conversation. Now, it’s simply not the case. Unless you’re doing a North Asia and a South Asia focus and you’re going to try and split a combination of a requirement between the two, Singapore literally is far and away a better market. It has to do with the size, it has to do with ability moving forward, attractions from first deployments particularly like I mentioned before out of the US into Asia Pacific.

Bob Tan: And is it also because of the availability of land you think?

Paul Dwyer: Yeah, that’s got a lot to do with that. I think there’s a number of different factors, availability of land, leadership, government process, the promotion of the sector, its stability, its geo-political climate. Generally everything about Singapore is set up quite well for the data center market. It’s always been a popular destination particularly with companies from the West Coast of the US.

Bob Tan: Sure. So on that note, I mean Singapore obviously had a lot of new developments and supply come into the market in the last 12, 18 months. With the likes of Telin, with a new couple of data center, STT, etcetera, do you think there’s an oversupply currently in Singapore?

Paul Dwyer: This is a very common topic and we get this run past us almost on a daily basis. First and foremost I don’t believe in the oversupply, particularly in Asia Pacific. I don’t think any market is over supplied and simply the reason being is that more people live in Asia than anywhere else on earth. So how can there possibly be an oversupply of data centers especially now and in the lead up to 2020. So I think—the last conference I attended, one of the key note speakers defined over supply to be the wrong product built on the wrong location. And so not necessarily anything to do with market and demographics or anything like that.

You’re right, a ton of space came to Singapore last 12-18 months. I think the market grew by roughly 30 percent and that’s tough for any market in the world to cater for and also tough in any other sector. But if you look at that supply a lot of it is just shell build it’s all down phases; a lot of it is pre-committed. So if you really dive deeper into the layers of supply you’ll probably find that there’s still far and away more to grow.

Bob Tan: What about in terms of the diversity of the customers? Do you see changes in the Singaporean, Hong Kong market and region as a whole? I mean there’s a huge rise with Chinese corporates, there’s a raise in Cloud. At the same time they’re seeing a change in the banking environment which used to be the anchor of the tenant. So do you see changes undergoing in these markets this at the moment?

Paul Dwyer: If I look back over the past 5 years I think it’s been a complete evolution of the market, almost. If you’ll have a look at what banking and finance has done for Hong Kong and Singapore and probably Shanghai, Tokyo is well with the stock exchange and with the links to having those necessary requirements to back up trading floors etcetera. Banking and finance has been what data centers has been about in Asia for 10, 15 years. But with technological changes, with adoptions of new technologies and changes in legislation, banking requirements are still in existence but they’re actually changing in what they need. So footprints are becoming smaller, guys are looking for more flexible solutions which ultimately all points towards Cloud.

Cloud is driving every single market in Asia Pacific and changing the market place. It’s creating new operations. Some companies are forming strictly just to prepare themselves into house Cloud, nothing else. So that bringing a different style of build obviously with the new catch phrase in the market is ‘hyperscale’. So it means these guys are building bigger, quicker, and are looking to really take advantage. So the markets are changing and I guess Singapore as you alluded to previously has got land, has got the ability to house these things and to provide flexible homes for new operations. So yes—things are changing.

Bob Tan: So in terms of hyperscale, obviously the real estate and the power infrastructure they may require would be much larger compared to historically, but in terms of the space and the infrastructure provision comparing Singapore, Hong Kong, do you see the edge in Singapore in the sense that at least in Singapore you have the Economic Development Board (EDB), the Infocomm Development Authority (IDA) and Jurong Town Corporation (JTC) actively trying to make land available?

Paul Dwyer: Yes—a hundred percent. I think the easiest way to put it is that the Singaporean government gets it. They get the need for diversity of location, they get the need for green field availability, they get the need to have a structure in place which is easy to access, promotes themselves as being your first appointment into Asia and it’s basically a pathway—it’s very easy.

And I guess if you look at it from the fundamentals of Hong Kong, it has got some issues coming up. It does have supply coming but it’s all on the same location and the market itself is crying out for other locations, diversity and options to be able to grow. But if you have a look at the Hong Kong real estate market, it’s expensive, its suitability of buildings is not great. So it’s an interesting way ahead but ultimately, hyperscale and other types of high-tier data centers need green field, and in Hong Kong this is not available.

Bob Tan: So I suppose the government as well as perhaps master developers in different mature markets will have to be sensitive to those needs. But how do you see that playing out in for example other key markets such as Tokyo and Sydney?

Paul Dwyer: The Tokyo and Sydney markets are interesting. They are geographically removed from the rest of Asia and Asia Pacific to some extent. So that puts pressure on them to be included in any sort of regional strategy. So for those two particular countries, they are driven heavily by internal demand, which is quite staggering especially when you have a look at what’s happening in Sydney.

Cloud adoption is through the roof. They punch far above the weight in terms of technology adoption. The heated population and the amount of capacity that they’ve got, it just keeps going from strength to strength. It shouldn’t have the market it has now but you’re still seeing companies investing heavily into that market and continuing to do so. So it’s an interesting time for those two in particular, but they do work well from within and have strengths in their particular in demographic.

Japan has the ability for green field development. US Cloud operators are very well received; the adoption of the technology in Japan for OTT platforms and anything online has always been huge and that doesn’t show any signs of lessening off. So Osaka is about to get its own Cloud zone so you know there’s certainly a lot of demand happening in those two geographies.

Bob Tan: True, that’s very insightful.

Paul Dwyer: So if I turn the conversation to your side. You’re basically talking to the other side of the market that doesn’t necessarily talk to me and that’s investors and guys who are looking to put cash and try and grow the sector their way. Why are data center investors so interested in Singapore and Hong Kong?

Bob Tan: Well I think the short answer is the product. As with any other asset classes, whether it’s data center, self-storage, healthcare, senior living, education, the investors tend to go to the places where there are products to be found and products that are available for investing. So it goes without saying that Singapore and Hong Kong are one of the key mature markets where they tend to have a little bit more opportunities available for people to look at. There are some potential opportunities in emerging markets but I think in terms of volume, Singapore and Hong Kong still have by far the most supply in the market.

Paul Dwyer: Who are these guys? What type of investors are they? Is it the usual suspects? Who’s looking at buying facilities in Singapore and Hong Kong? Is it providers? Is it operators, new players? Telecommunication carriers? Is it the traditional who you normally associate with?

Bob Tan: I think generally it’s all of the above. We’re seeing interest from all the different types of investors/operators. As you know the numbers of operators have come in Singapore. With the process they were running right now, we see a new entrant who is only exclusively in the US now but coming into Singapore as they made an investment. So these types of operators, they have a desire to grow together with their existing portfolio of customers who need to have a presence here in Asia Pacific.

But at the same time we are also seeing other groups of investors. So these are investors who invest across the whole spectrum of real estate. But depending on the geography, depending on the property cycle, there are certain asset classes wherein the yields have compressed to a level wherein it doesn’t deliver the returns that they require. So I think over the last couple of years we are seeing increasing interest from investors to look into alternative asset classes and data centers are being featured quite strongly on their radar. So I think it’s all of the above in a short answer.

Paul Dwyer: What’s the mix like in terms of where they’re coming from, is that international players seeing a great opportunity in APAC and in particular in Singapore and Hong Kong, or are they local?

Bob Tan: Interestingly we are seeing a bit of both as well. I mean at the top end of an investor you have groups like Blackstone who has also invested. You have The Carlyle Group who raise funds specifically for data centers. At the same time you also see big, institutional funds like Alpha Investment Partners who have set a dedicated data center fund trying to look for opportunities. So there’s a good mixture of international and local players but I think the key thing is to be able to source the product.

Paul Dwyer: You just touched on Blackstone, Carlyle we know these names. You know Blackstone is one of the largest property funds in the world, but they’re a property fund. In terms of a technology play like this what are they looking for? Are they wanting to dump cash into equity, are they looking to buy the assets; are they looking to invest in operations, and what is it that they are looking for?

Bob Tan: Well I think with data centers uniquely, within the spectrum of alternatives, the op-co and the prop-co pretty much have to go hand in hand. It’s very difficult for one to separate both op-co and prop-co because for data center operations, they have to sign up to fairly stringent service level agreements. And most of the time the operator wants to have absolute control and ownership of their property and underlying real estate. There are some investors who have come to us and said that we only want to invest in the prop-co. Such opportunities are less available just so because of the nature of this sector.

I think the best example of where you will look in this case is the partnership between Maple Tree and Equinix or Maple Tree and Amazon and AREIT and Singtel wherein the so called investors are also developers by their main business line. So they are able to offer a unique offering wherein they have land, they are able to deliver base build and then enter into a long term arrangement with the potential tenants/ operators. So we tend to see more success in these types of an arrangements but otherwise most of the other investors who do not necessarily have the operation, experience, resources, capability, they’ll tend to look to the set-up a JV with perhaps a fairly new outfit that is helmed by seasoned, experienced veterans, with the likes of Bain Capital perhaps, and others who have done similar arrangements. I think in this type of arrangement tends to work best for these types of investors.

Paul Dwyer: Okay, a bit of crystal ball gazing now, Bob. As we both attest to on a daily basis…this market, this sector, this industry is changing all the time and looking forward—how do you see the data center industry and in particular investing in Singapore in the future?

Bob Tan: I think this is a fairly tough question. I think if you look at historically how Singapore has grown, if you look back about five, six, seven years ago you can actually count the number of data centers on your left and right hand. But today they are something like 40, 50 data centers in Singapore alone. So the tremendous growth of that perhaps is attributed to the geographic advantage, the stable political climate, you know the clear rules of engagement in terms of legal, in terms of economics, business, etcetera and a huge support from the government to try to push for this sector. So I think in the long run, this sector will continue to do well and will continue to attract capital. And I think with time to come we will be able to serve as a platform to serve the surrounding Southeast Asia markets as well.

Paul Dwyer: All into account, from what you are saying there’s a lot of guys looking at the industry, a lot of different platforms, a lot of different institutional players in a host of different ways. But how much these are actually translating into market activity?

Bob Tan: I think there has been a huge amount picked up over the last two years. We are probably looking at a quasi-consolidation and stabilizing phase. But moving forward, I think for new investors looking to come into Singapore, they have to be able to look towards securing and have a good relationship with potential tenants. Most of the time if they have the customer in tow, it’ll make the investment a lot easier.

The other thing for new investors to watch out for particularly in Asia Pacific is that the underlying land tenure is a lot shorter. Freehold land is difficult to come by in most markets across Asia Pacific. It comes in a form of a leasehold, so the ability for it to advertise and stretch out your financing maybe a bit limited. So that’s something that they have to take into account when coming up with the business case.

Paul Dwyer: Thanks Bob and I’m afraid we’ve run out of time now but thanks so much for joining me for this special podcast. Let’s catch up again soon and discuss some more primary market stuff in the region. And also I guess something that you service as well out of Singapore is those emerging markets in Southeast Asia.

Paul Dwyer: Thanks for listening everyone. I’ll give you my e-mail address, paul.dwyer@ap.jll.com, also on LinkedIn. Any Twitter users out there can get me on Twitter as well. The Twitter handle is @dwyer_dc. And Bob if guys are looking to get hold of you?

Bob Tan: If anyone is interested to talk to me about potential investments and data centers, please feel free to drop me an e-mail. My e-mail is bob.tan@ap.jll.com.

Paul Dwyer: And if you like to read more about how technology is changing the world of real estate take a look at www.futureofwork.jll. Thanks everyone.

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