Data Centres Market InsightsAugust 26, 2022 / By
Sustainability and social responsibility gaining centre stage for data centres
ESG has risen to the top of the agenda for data centre operators striving for energy efficiency in a Net Zero Carbon world. JLL research and analysis show that “becoming more sustainable and socially responsible” is the topmost priority for data centres in the next two years. Reducing power consumption, minimising waste and relying more on renewable energy sources are among the key initiatives that data centres plan to adopt to progress on their green journey. While there is unanimous agreement that energy efficiency is key for data centres and profoundly impacts business operations and decision making, our research found that only 27% of the data centres have visibility of energy usage and cost data to drive correlation between spends and business performance, while 58% strive for energy efficiency but track it in a standalone manner instead of linking it back to value created for the business. Transparency and visibility of key energy efficiency metrics are crucial for this sector because it heavily impacts both business operations and decision-making. However, a lack of globalised data centre standards does not make the task easy for the operators. It is therefore essential that operators develop clear and welldefined KPIs to gain investor trust and impact shareholder value to maximise returns.
Expansionary phase of data centres in Asia Pacific opens development stage valuation opportunities
Limited investment sales evidence to support assessments of value is a prevailing theme. This is a function of limited opportunities being presented to the market rather than subdued market conditions, and reflects the overall status of the Asia Pacific market landscape which is within an expansionary/growth phase characterised by a build-to-scale approach from the likes of operators and developers. Investment activity as such is limited mostly to site sales and selected brownfield development opportunities in more mature markets. Active engagement in assessing value for development projects in the current cycle is therefore providing valuable indirect market evidence. Aside from these limitations as well as challenges in navigating a rapidly evolving macroeconomic environment, core operational fundamentals and market influences need to be understood and interpreted, including but not limited to the existing or proposed operational model which includes the sophisticated ecosystem of potential end users such as enterprises, telcos, IT service providers and over the top (OTT) companies. The complexity of the data centre sector can’t be underestimated when it comes to forming a well-considered assessment of value.
Global challenges impacting new data centre builds
In the existing highly competitive environment, reduced ‘time to market’ has become very crucial for operators. Globally, timely access to the major mechanical, engineering and plumbing (MEP) plant & machinery and construction materials for building new data centres has become a challenge. The requirement for MEP plant & equipment and construction materials is growing year-on-year in the data centre market. COVID-19 has had a negative effect on the major equipment manufacturers’ ability to meet the demand for the products. Added to this, global logistics has also suffered. The combined effect has resulted in an increased delivery time. The global microchip shortage has caused further delays, as all major MEP plant & machinery has microchips embedded within the control logic systems. The global geopolitical situation has also destabilised the supply of key energy sources used in the manufacturing and logistic processes and increased commodity pricing globally, resulting in increased construction costs within the industry. These factors need to be fully considered when setting project budgets, preparing project construction programmes and establishing long-lead procurement strategies.
Scarcity of skilled resources to manage data centres
The construction of new data centres in Asia Pacific is expanding beyond the tier-1 or mature data centre cities/ countries markets. This shift has been driven by multiple factors like cost, land availability, international connectivity, technology and other reasons. Most often these locations have a paucity of data centre professionals. Data centre resources are hard to find due to rapid expansion in the industry. The trend of new data centres in tier-2 /3 markets is making talent sourcing even harder. This means that data centre resources are now a critical priority, and the only way to address this operational risk is through a complete data centre talent programme covering everything from acquisition, development, and retention, which are all critical to maintenance of the operations.
Government regulations continue to tighten around sustainability, data privacy and national sovereignty
Until recently, data centre development has generally been encouraged by governments within Asia Pacific. Governments have recognised the importance of data centres as essential infrastructure for building a digital economy. Most governments have policies or strategies in place to encourage the growth of the industry within their borders. The explosive growth in data centre development to support the digital economy has not been without costs. Centralisation of the digital economy in a few large data centre facilities has given governments visibility of actual power consumption which is getting higher. In Singapore, it represents 7-8% of the country’s total power consumption. At the same time, governments are under pressure to meet global climate change commitments and data centres are in the crosshairs. Existing operators are under pressure to use more sustainable energy and to make their operations more efficient. Similarly, new developments must meet more stringent design, construction and operations requirements. This directly impacts investors in terms of their ESG activities and reporting. Governments are also becoming sensitive to the protection of their citizens’ personal data, governmental data and the ability to physically control that data. Government regulation in many countries is moving towards greater mandatory storage and control of national data within sovereign borders.
Data centre growth extending to edge and driving up rack densities
Interconnected data centres now extend globally from core to edge. The edge in a data centre context extends from core through to country level, metro level, campus or building and then finally into systems and sensors. At the edge, we are seeing new infrastructure form factors and smarter applications including smart cars, smart cities and smart buildings. In addition to utilising new form factors, edge data centres often use software-defined infrastructure and support consumption models for clients. Delivering and managing digital services at the edge will become a challenge for many organisations. Organisations will rely on data centre operators to deliver some of these services. New next-generation applications such as crypto-mining, artificial intelligence, machine learning and augmented reality require much more computing to run. They generally use graphical processing units (GPUs) which were originally used for complex graphics rendering in gaming. As a result, rack densities are up, heat generation is up, more cooling is required and overall data centre facility power consumption is shooting up. Rack density in Asia Pacific organisations in 2021 was a median of 16-18kW per rack with an expected increase to a median of 19- 20kW per rack by 2023 (IDC 2021). Since activities at the edge require increased processing power, data storage and network bandwidth, so too must data centres physically build out from core to the edge to accommodate this.
Strong capital flows with JVs dominate Asia Pacific data centre investments
Most Asia Pacific transaction activity regardless of transaction type points towards continued growth and development in the data centre vertical. With regard to fundraising, we continue to observe capital in pursuit of operators or direct project opportunities. Princeton Digital Group reached financial close on a USD 500 million equity raise from Mubadala and VNET raised USD 250 million from Blackstone. At the fund level, Keppel capital has closed a second DC-focused fund reaching USD 1.1 billion in capital commitments. Joint ventures (JVs) to develop data centres have featured in 1H22, as the approach to surmount market-specific hurdles or bring complementary skillsets together of note: Equinix together with GIC formed a USD 525 million JV to build two xScale facilities in Seoul whilst Canadian Pension Plan Investment Board and Pacific Asset Management have also come together in Seoul to develop a hyperscale data centre. Other examples include NTT GDC and QD. Tek in Hanoi, STT GDC, Globe and Ayala in Philippines and Singtel and Gulf Energy in Thailand. Underlying fundraising and partnership formation, DC operator land acquisitions continue to come through around the region with SpaceDC in Jakarta, NEXTDC in Adelaide, and BAM Digital Realty in Chennai.