2020 is a year to forget for commercial real estate investors in Hong Kong. As the economy was hit by the double whammy of geopolitical tensions and the COVID-19 pandemic, investment volumes remained subdued. Capital values declined across office, retail and industrial sectors in the first three quarters. Despite the uncertainty, investors progressively diversified to alternatives with data centres high on their radar.

Hong Kong is an important data centre market in the Asia Pacific region, with its low tax rates and electricity costs, limited climate risks and rich network capability. Even the economic recession could not deter the expansion of data centre operators in the city. Notably, China Mobile acquired an industrial site in Fo Tan for data centre development for HKD 5.6 billion in July. The accommodation value of HKD 5,967 per sq ft is the highest on record for an industrial site.

Data centres are a unique asset class, and it is not easy to separate its operational aspect from real estate. The size of the data centre market cannot be measured by floor area, as is the case with traditional assets, but by power capacity in megawatts (MW). JLL estimates that the current size of the data centre market in Hong Kong is around 307 MW, with more than 300 MW in the future supply pipeline. The majority of data centres are in Tseung Kwan O, with secondary clusters in Kwai Chung, Shatin and Tsuen Wan, to provide redundancy. Currently, major data centre operators in Hong Kong include Global Switch, Equinix, iAdvantage, NTT Communications, PCCW and Digital Realty, while AirTrunk and GDS will enter the market in the coming years.

Data is the new oil that powers the digital economy. As data usage is expected to grow with the development of Internet of Things (IoT) applications, 5G network and cloud computing, the demand for data centres to store, process and distribute data will inevitably increase. Nowadays, some enterprise data centre users still take their own colocation space. In the future, once cloud security issues are overcome, most enterprise users will likely switch to cloud solutions. The main source of data centre demand will then be from cloud operators, such as AWS, Microsoft, Google, Alibaba and IBM. These hyperscale users will take space in 4-5 MW portions with capacities to scale up to more than 15-20 MW. Therefore, it is expected that hyperscale facilities will ultimately dominate the data centre market, and small-scale sites will no longer be viable.

Scarcity of suitable land is a hindrance to data centre development in Hong Kong. The data centre site should have a large area with a relatively low plot ratio of around 5.0 to ensure operational efficiency. While the existing industrial revitalisation scheme allows redevelopment and wholesale conversion of aged industrial buildings to data centre use, opportunities suitable for hyperscale development are rare. Hence investors will have to be aggressive in their bids for the desirable sites.

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