If data is the new oil, data centres, the massive energy-sapping buildings containing the racks of servers storing and processing all that data can perhaps be best described as oil refineries and oil tank farms of today. This in turn makes data centres an asset that can be traded among investors riding its growth.
For instance, ST Telemedia Global Data Centres is reportedly planning to raise more than US$1 billion ($1.37 billion) in an IPO that will value the Temasek-backed company at more than US$5 billion. More recently, Australia-based AirTrunk is similarly said to be weighing a US$1 billion offer that will see the company valued at around US$10 billion.
Closer to home, the most recent investment in data centres was announced on Sept 18 when Singapore Telecommunications Z74 (Singtel) announced that KKR has taken a 20% stake in its regional data centre (RDC) business for the equivalent of $1.1 billion. This investment puts the enterprise value of Singtel’s overall regional data centre business at $5.5 billion.
As at June 30, the total capacity of Singtel’s existing data centres across the region stands at 61MW. It plans to increase this to 200MW. KKR will have the option to increase its stake to 25% by 2027 at the pre-agreed valuation.
KKR’s investment works out at 32x EV/Ebitda on a historical basis and 31x EV/Ebitda based on forward ebitda. In comparison, on a trailing 12-month basis, Keppel DC REIT’s EV/Ebitda is around 22x (see table below) while Digital Core REIT’s EV/Ebitda is at around 19x although its forward EV/Ebitda is lower. However, these valuations are not strictly comparable.
KKR’s EV/Ebitda is likely to be based on capacity while those of KDC REIT and DC REIT are based on the rentals from data centre operators who are tenants. The two REITs are the only pure Singapore-listed data centre plays available to institutions and high-net-worth and retail investors. Elsewhere, more than 50% of Mapletree Industrial Trust ME8U ’s AUM comprises data centres.
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In July, IMDA announced it was provisionally awarding 80MW of data centre capacity to AirTrunk-ByteDance, Equinix, GDS and Microsoft after lifting a moratorium on data centre capacity which had been in place for about four years. Wandrille Doucerain, head of BD data centre solutions at ENGIE SE Asia, estimates that each megawatt costs US$10 million to build. This means the 80MW data centre is likely to cost some US$800 million. This is not comparable to the price KKR paid in the KKR-Singtel transaction as it involves a ready capacity of 61MW and a future capacity of 139MW.
Property consultancy Cushman & Wakefield notes in a recent update on data centres: “Singapore currently has the greatest operational capacity of any city in Asia Pacific outside of mainland China and its vacancy rate remains the lowest in the region … Singapore’s data centre market is on track to exceed 1GW in 2024 but a limited pipeline of planned and under-construction supply will see other markets overtake the city-state’s operational capacity in the coming years.”
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Private equity as investors
Private equity investors are in a better position to reap rewards from data centres as they have a larger pool to choose from. In February, CapitaLand Investment (CLI) announced CapitaLand China Data Centre Partners (CDCP), a US$530 million China data centre development fund. CDCP has committed to invest in two hyperscale data centre development projects in Greater Beijing with about 100MW of capacity.
CLI also has two data centre funds for developing data centres in South Korea. Investors and capital partners of its private funds include institutions. These are often sovereign wealth funds, pension funds and insurance funds, and sometimes family offices.
CLI has different models for the various stages of its data centre development. Altogether, CLI has 27 data centres globally, with over 500MW in total capacity. On a fully developed basis, that equates to about $6 billion of funds under management (FUM).
The data centres that are stabilised and operating in the UK, Europe and Singapore are held in CapitaLand Ascendas REIT A17U (CLAR). The data centres in China and South Korea, held in private funds, are still under development.
In its data centres under construction in South Korea and China, CLI has incorporated green and energy-saving features. These include high-efficiency fan wall cooling systems and automated temperature management systems that manage temperatures in different zones.
Patrick Boocock, CEO of private equity alternative assets at CLI, says: “We have systems that recycle the heat that is generated from the servers into the adjacent office space. Beijing does get cold in winter so we believe that has achieved about 20% energy savings compared to conventional cooling and heating systems.”
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“Given that a data centre is basically a large industrial building, we are putting solar panels on the rooftop,” he adds.
A better business model?
In India, CapitaLand India Trust (CLINT) holds the data centres under development on behalf of CLI. Although CLINT is a property trust and not a REIT and has the flexibility to take on development, it adheres to REIT guidelines. These include paying out 90% of its distributable income and keeping its aggregate leverage below 45%. The property trust business model is important in helping CLINT receive higher-than-average returns as yields on cost for development projects are a lot higher than for stabilised assets.
In 2022, CLINT received in-principle approval from Maharashtra State Electricity Transmission Company MSETCL for a capacity of up to about 108MW for its Navi Mumbai data centre which has started construction. CLINT also announced plans to develop another two data centres in CLINT’s existing IT parks — namely International Tech Park Hyderabad (ITPH) and International Tech Park Bangalore (ITPB) with capacities of about 41MW and 42MW respectively. The plans also include in-principle approval from Transmission Corporation of Telangana to provide a power capacity of up to approximately 80MW for the data centre at ITPH.
In addition, in December 2022, CLINT acquired a 4-acre land site of about three football fields in Chennai for the development of a greenfield data centre which will yield a capacity of approximately 54MW. Boocock says: “In India, we have assets that are under development and in the pre-leasing stage. We are in the early stages of developing four sites and reflecting on what operating model we prefer.”
ESG and sustainability
Data centres play an essential role as part of the infrastructure underpinning today’s digital economy. However, to function properly, they guzzle a lot of energy — not merely to run the endless walls of servers hosted within but also to keep temperatures within the building at an optimal level.
Some operators have built data centres in underground caverns while others have toyed with an underwater setup. Either way, the data centre industry needs to go “green” if growth is to be sustained to keep up with skyrocketing AI growth, which also sucks up a lot more computing power.
However, Singapore cannot be considered a green location for data centres. While there is an active push towards renewable energy in the city-state, the most reliable source is still imported gas, notes Doucerain.
Doucerain points out: “These assets are taking power and emitting CO2 which are determined by the energy source the country uses. In Singapore, 95% of the economy is powered by gas. In Indonesia, it is coal- and gas-related. Emissions will be very high. For example, Norway runs on hydropower, France runs on nuclear power and their emissions are very low.”
Nonetheless, data centres in Singapore are adopting sustainability practices. This includes new technology that is still being developed like immersive cooling which saves the energy used by data centres. While immersive cooling is more expensive than air cooling to implement, the higher cost is offset by savings in energy cost.
Nupur Joshi, CEO of the REIT Association of Singapore or REITAS, in an earlier interview with The Edge Singapore, says that sustainable practices can often lead to operational savings over time. These include installing energy-efficient lighting, optimising HVAC (heating, ventilation & air-conditioning) systems and using advanced building automation to monitor and control energy usage.
And there is a growing pool of capital being allocated to fund green buildings as well as buildings transitioning to green, says Joshi. “For example, many banks have their own net-zero targets and commitments and are therefore looking to lend towards such projects. REITs that are similarly moving to green their portfolios will be well-aligned with the lending goals of banks. Equity investors too have their own sustainability criteria and goals and are increasingly looking to invest in REITs that have a credible sustainability roadmap and targets,” says Joshi.
Boocock says CLI is already offering so-called “fully integrated platforms” in this focus on sustainability. He says: “We have folks in our major markets of Singapore, China, India, Europe and South Korea who are responsible for designing and operating data centres and acquiring and maintaining customer relationships. This is critical. Some of our peers don’t have that fully integrated nature and boots on the ground that we have.”
“This means we can offer customers all different types of operating models. These include built-to-suit or build-and-maintain or core-and-shell for hyperscalers. We can even take on full leasing risk in the data centre if we so choose,” he adds.
Obsolescence a challenge
Back in the late 1990s, Jason Lee was a project manager building data centres when he was at Capital One. This gave him an insider look at the nuts and bolts of how the industry operates. See recalls: “The data centre was an internal facility servicing our company’s customers. We spent a lot of effort on fire safety systems as fire would damage equipment which was very expensive. There was also a focus on power protection with a lot of investment in uninterrupted power systems and equipment.”
The data centres then were also situated away from gas stations, highways and any hazardous facilities. This means project managers had to focus not just on real estate but on risk mitigation. Lee says: “The racks were large but today they have become smaller. There used to be cables on raised floors. Now, most of the racks and cables are not exposed. Cooling is a big issue.”
Today, as chief investment officer and senior portfolio manager at AEW, See is taking a more strategic view of this market’s dynamics. He thinks there is no shortage of investors, although expectations could be high, particularly with the rapid growth of AI. “In the short-term, demand is definitely there and the trajectory is very clear. The risk going forward is obsolescence,” he cautions. Unlike office buildings, houses or malls, what keeps data centres up-to-date is their capacity “in MW and GW”, and energy management, he adds.
According to Lee, data centres are prone to technology revolutions. As a result, data centre owners or operators sometimes divest their older assets to invest in new developments. Digital Realty divested portfolios in the US to Mapletree Investment and Mapletree Industrial Trust, and a portfolio in Europe to CLAR.
“There are a couple of major topics for real estate investment in data centres. These include potential obsolescence and ESG and what that does to the portfolio. Choosing the right operator and operating model — opco or propco — is also very important,” Lee says, referring to whether investors are interested in the operating company model or the property company model.
As Boocock points out, CLI has both opco and propco models. Some of the stabilised data centres are on master leases where the operator cum tenant takes care of expenses. “End users don’t commit until you begin building and then you start talking about the operating model.”
CLAR’s acquisition announced in August has a co-location model. The REIT announced the acquisition of a data centre in Watford, a satellite town of London, for the equivalent of $200 million. The co-location data centre is 80% occupied with a weighted average lease expiry (WALE) of 3.3 years. The land area is 25,000 sq m with a remaining land lease of 85 years and a total lettable area of 8,412 sq m. The capacity of the centre was not revealed.
Elsewhere, CLI’s China data centres are likely to be a mix of core-and-shell, where CLI does not take operational risk, and a model where CLI takes full operational risk. Boocock says: “With the size of the campuses at 100MW in total, we will find Chinese domestic hyperscalers and co-location enterprises adjacent to them because co-location enterprises like to be co-located with hyperscalers because of connectivity.”
According to him, latency, which refers to the total time taken for data to be acquired by a sensor before it is made available to the public, is an important issue. The location needs to be in a place with a ready energy source, whether renewable, green or brown as AI requires copious amounts of energy and fibre connectivity.
“Latency becomes less of an issue because the AI machine just sits there and learns and then communicates back. But finding sites is critically important. In major developed markets, this is becoming more and more challenging because you need to find a site in an availability zone that has [renewable] energy and fibre connectivity,” Boocock says.
Why invest in data centres?
Given the structural growth, is investing in data centres a sure bet? According to Doucerain of ENGIE, historically, private equity received the best returns from data centres. For instance, investors in CDCP are likely to get in at the development stage. This is because projects under development provide their investors with a valuation uplift once they are operational as cash flows are very stable once the owner has signed an operator or tenant.
“Firstly, tenants will stay and renew their leases, as long as they’re happy with the infrastructure,” notes Doucerain, who sees stable cash flow, demand and digitalisation as key drivers for further investment. Secondly, the demand for data centre capacity is likely to grow with demand for data, he adds.
“Thirdly, the need for infrastructure in fast-growing markets like Asia Pacific continues. Lastly, tech companies underpinning this growth are the most profitable in the world,” he points out. Building IT infrastructure in markets like India and China “is absolutely massive”, says Doucerain.
Of course, investors are also increasingly demanding sustainable and green data centres. Even then, some economies cannot wait for green energy to build their data centres.
“Indonesia and Philippines were so in need of the IT load, they went ahead to build. In Asia Pacific, green energy is less available but data usage is booming,” Doucerain says. On the other hand, some financial sponsors will not finance data centres unless there are sustainability attributes, he adds.
In India, CLINT has an advantage as it has the land and fibre connectivity in major hubs like Mumbai, Chennai and Hyderabad. More than that, the Indian economy is undergoing rapid digitalisation with its India Stack, a set of open APIs and digital public goods for identity, data and payment use at population scale; the Unified Payments Interface (UPI); and Aadhaar, a 12-digit unique identity number.
Although India is the second-largest social media user market globally, it has a very low data centre density of less than 1MW per million of population. The Indian government has also been pushing for data localisation and digital payments, which should boost the data centre demand across technological, financial, media and healthcare sectors.
“We’ve got thousands of boots on the ground in our major markets of China, India, Singapore, Korea and Japan. We have the ability to find those sites,” Boocock says, referring to the sweet spot of having a renewable energy source, the interconnectivity of fibres, and hyperscalers and other operators who need data centres.
Still, gaining a return from this sector isn’t just about cash and bytes but having experts at the location as well. “For people who don’t have the boots on the ground, it becomes more difficult.”
