Investors adopt develop-and-own model as Asia data centres continue to shine

Asia’s fast-growing data centre sector has become a target for regional investors who are getting involved earlier in the data centre development process and then partnering with specialist operators to run them. 

Rushabh Desai, chief executive of Allianz Real Estate’s Asia Pacific business told AsianInvestor that Allianz is looking to follow a develop-and-own model in its data centre investments. It recently made its first Asia-Pacific data centre investment via a fund.

“The sector is becoming very attractive among real estate investors with capital heading towards developing and owning core data centres. Asia Pacific has seen tremendous growth particularly in Japan, Singapore, Australia, India and China,” he said.

Desai said Allianz’s target net return was typically between 8% and 12% in euro terms and that its data centre investments fitted with its appetite for value-add or opportunistic property investments.

“There are development and leasing risks, coupled with operational and regulatory risk. In the near term our intention is to hold these investments for between three and five years and enjoy the total returns.

"On a longer-term basis, we would like to own operational data centres,” he said.

Demand for finance

Christopher Curtain, Omers Infrastructure’s head of Asia Pacific in Sydney, told AsianInvestor that  high demand for finance to build data centres was making the sector increasingly appealing.

He said the company was looking across Asia at both mature platforms – comprising a number of operational centres across the region – and early-stage platforms; typically one or two operational centres with a strong appetite to develop more.

“The consistent thematic is strong tail winds and growth and lack of correlation with other assets,” he said, adding the company was looking at the sector across Asia Pacific. 

Tom Fillmore, director, Asia Pacific data centre capital markets, at CBRE in Singapore told AsianInvestor that in such deals, investors benefitted from operational expertise and access to end-customers while the operator was able to focus on designing, building, and operating the data centre.

Hunt for yield

Joseph Lee, co-chief executive and president of Seoul-based real estate fund manager Igis Asset Management told AsianInvestor that the firm had closed two data centre deals in Korea in the early part of 2021.

In both cases they were development-and-operate deals because of the higher returns on offer. Igis, which targets a yield of 6% for an investment period of four to five years, then aims to sell the assets with one or more secure long-term tenants with a yield of 5%.

Lee added that the fund would like to make an additional acquisition outside Korea over the next year in Asia, with Japan  the most likely candidate. 

Generally, however, Lee said the manager preferred the US sector, given its larger size compared with Asia or Europe and because of the scarcity of operators with proven track records in Asia. 

Spencer Park, a Hong Kong-based counsel at law firm Dechert - which has a strong clientele among asset managers and securities banks in Asia -  told AsianInvestor that he was working on several data centre deals currently for clients. 

In the majority of cases investors were adopting a develop-and-operate model, he said.

Seeking operators

For many in the sector, finding the right operating partner is key.

“[Knowing] customer networks, understanding good locations, getting access to power, and fibre networks – all this needs the experience of operators,” Mary Power, principal consultant and head of property, for Jana in Melbourne told AsianInvestor.

She said that for Australian superannuation funds, the investment case for data centres was continuing to grow.

“The investment thesis is strong, also not correlated to GDP so attractive and the users of data centres are sticky so there is little switching.”

Park said the typical process involves and investor finance, the build of the data centre itself and forming a joint venture with an operator – typically in place before the build has commenced – to operate it.

Most operators are US firms since investors favour their skillset and track record.

“Investors typically want the centre to be up and running within three years and have an investment period of between five and ten years,” he said.

“Everyone I speak to is keen on data centres; it’s just a matter of degree. Even before the pandemic, Asia was the big opportunity,” said Park, adding that the operational dimension was increasing interest from private equity investors.

Fillmore said the range of investors into data centres was growing. “We see investors of all types looking to partner with data centre operators, from sovereign wealth funds, PE firms and logistics developers.”