Global investors on hunt for Asian data centres

Several major investors in Europe, Australia and New Zealand are stepping up their hunt for data centre assets in Asia as investment interests in the sector spikes, despite dwindling opportunities and rising prices

The APG - a Dutch pension investment company - is looking to expand its allocation to the sector, with a focus on South Korea, despite the stiff competition for deals, its head of private real estate for Asia Graeme Torre told AsianInvestor. 

“We see opportunities to expand our data centre exposure throughout the region, especially where there is access to suitably located land and power supply. The more of the power supply from renewable sources, the better,” he said. 

The New Zealand Superannuation Fund (NZ Super) - a sovereign wealth fund with NZ$60 billion ($40.5 billion) in assets under management - is also looking at possible large scale data centre investments in Asia, Toby Selman, who leads its property investment strategy, told AsianInvestor, without giving details.

Meanwhile, AustralianSuper is looking for similar investment opportunities, including in Asia, its head of property Bevan Towning told AsianInvestor, but he declined to give more details on the likely targets in the region. 

According to CBRE, direct investment in the data centre sector in Asia Pacific totalled US$4.8 billion in 2021—more than double the previous high of US$2.2 billion in 2020 and surpassing investment volumes for the past four years combined.

The company predicts transaction volume and fundraising activity to remain robust in 2022, with data centres ranking as the most popular alternative investment for the third consecutive year. Yields for a typical data centre in Tokyo have compressed from 5.75% in 2018 to 4.95% in 2021, according to CBRE. Over that period, typical US data centre yields have compressed from 6.5% to 5%.  

INVESTORS SHIFT TO DEVELOPMENT

As supply dwindles, the target of new investor flows is shifting towards earlier stage developments. “The market is driven more by partnerships [where investors find land and build an asset on it],”  Sharon Chan, director of Asia Pacific capital markets research at CBRE, told AsianInvestor.

The current shortage of data centres also meant that the number of direct investments – where an investor buys an asset that is already built and running – had fallen in the last year, said Liz Hung, director of Asia Pacific research at CBRE in Hong Kong, to AsianInvestor.

“Where they are available, increasingly, data centre operators are buying and operating assets themselves.”  

She said operator-developers play a crucial role because they may already own or have identified land on which to build a data centre. They also have relationships with prospective tenants. “Developers may already have a land bank, or they know occupiers locally,” said Hung, adding that this is an important advantage as the supply of industrial land, especially in-demand sites that are close to metropolitan areas, is shrinking.

Partnership with these developers is a particularly popular route for investors from outside Asia who can benefit from their local knowledge and expertise, she said. “Forming a joint venture or partnership also means diversifying the risk.”

AustralianSuper's Towning said that operators were crucial to the success of a data centre investment because of their relationships with the major technology firms that provide the lion’s share of demand for data centre capacity, especially among the large hyperscale centres.  

However, he said that investors still had a vital role to play in the development of data centres. “It’s true that we are seeing that trend of data centres being bought up by operators, but a lot of the operators don’t want to own the real estate because they have a higher cost of capital [than investors],” he said.

HIGH ENTRY BARRIERS AND STABLE CASHFLOW 

The data centre sector, which attracts flows from infrastructure divisions as well as property arms, is also receiving the attention of IFM Investors, the Melbourne-based global infrastructure fund manager owned by 20 Australian super funds, that manages A$155 billion ($120 billion).

“IFM currently doesn’t have any data centre investments, but it’s an interesting area especially on the back of Covid-19, which turbocharged internet, data use and remote working, and provided tailwinds for the asset class,” its global head of infrastructure Kyle Mangini told AsianInvestor.

An IFM report in April, titled Resilience and Transition, highlighted the core appeal of digital infrastructure, including data centres alongside telecommunication towers and fibre networks: “Some of the features are typical to core traditional infrastructure investing, such as essentiality, high barriers to entry, cash-flow stability, and limited technology risk.”