The data center industry in South and Southeast Asia, excluding Singapore, is poised for remarkable growth, driven by digitalization and investments by telecommunications companies and real estate firms.
According to research by 451 Research, Malaysia, Indonesia, and India are projected to witness a compound annual growth rate (CAGR) of 10% to 25% in data center capacity over the next five years. These countries share common attributes such as a rising online presence, localized content, and a youthful population.
In contrast, Singapore is expected to experience more modest growth due to limitations in land availability and power supply, as it is already a mature market.
Telecom companies across South and Southeast Asia view data centers as a strategic extension of their core business. Leveraging their existing connectivity infrastructure and experience in managing capital-intensive ventures in regulated environments, telcos are keen to tap into their enterprise customer base by offering bundled services.
For example, PLDT, based in the Philippines, is constructing its 11th data center in Laguna, which will more than double its current 28MW capacity. Singapore Telecommunications (Singtel) is also strategically investing in data centers across Singapore, Indonesia, and Thailand, with the aim of increasing its gross data capacity to 155MW by 2026, up from the current 60MW. These investments are seen as a means to offset the slowdown in traditional voice and mobile businesses and prepare for future 5G revenues.
While data center investments may not offer the strategic value of 5G to telcos’ core operations, they enhance network reliability and reduce latency, particularly as data consumption continues to grow. Additionally, data centers complement other services such as cloud and ICT solutions.
Notably, data centers with favorable locations, strong network connectivity, and high-capacity utilization are considered valuable assets with high price multiples.
Real estate companies are also capitalizing on the data center trend as a means to diversify their assets and revenue streams. Data centers share characteristics with traditional property leasing, and during the pandemic, they proved to be more resilient than hospitality and retail sectors.
Data centers with long leases and a significant portion of rental income generate stable cash flows, similar to property leases. Some prominent real estate firms, including Mapletree Investments, CapitaLand, and ESR Group, have ventured into the data center space, positioning themselves for rapid expansion once they establish a solid track record.
The entry of international and regional data center providers is set to disrupt smaller markets previously dominated by a few key players, including regional telcos. Global data center operators and select regional telcos are building regional platforms to cater to hyperscalers and enterprise customers operating across multiple countries in the region.
Local telcos, such as Telekom Malaysia, PLDT, and Advanced Info Service Public are expected to focus on their domestic markets, leveraging their strong network infrastructure and expertise.
Sustainability-linked financing and green financing are emerging trends in the data center industry. Lenders are increasingly inclined to fund sustainable projects given favorable terms and growing preference for eco-friendly initiatives.
Green financing typically involves funding specific green initiatives such as energy-efficient data centers or procuring renewable energy. Sustainability-linked financing offers flexibility in the use of proceeds, tying interest rates to environmental, social, and governance goals.
While relatively few cases of sustainability-linked loans and green loans have been observed in South and Southeast Asia, these funding mechanisms hold potential for expansion. For example, Asia-Pacific-focused data center provider AirTrunk Operating completed a substantial A$4.6 billion sustainability-linked loan, doubling its initial A$2.1 billion loan in 2021.
Singapore, the regional data center hub, faces limitations in meeting the region’s growing data capacity demands due to land and power constraints. This benefits neighboring cities such as Johor Bahru in Malaysia and Batam in Indonesia, which are in close proximity to Singapore.
Key players like Princeton Digital Group, Equinix, Keppel Corporation, AirTrunk Operating, GDS Holdings, and Bridge Data Centres are planning to establish or expand their facilities in these areas.
However, Singapore is expected to maintain its status as the regional data center hub due to its open economy, political stability, reliable power supply, and extensive regional undersea network infrastructure.
The report also finds that increasingly stringent data localization rules in certain countries could reshape investment flows in the data center industry, with potential consequences for foreign investments. Many governments in the region are imposing restrictions on cross-border data transfer and data localization rules.
For instance, in October 2022, Vietnam tightened its data localization rules, requiring foreign-owned businesses in sectors such as telecoms, cloud, e-commerce, online payments, and social media to store user data locally. Similarly, Malaysia has a personal data protection act that generally prohibits the transfer of personal data outside the country.
In contrast, Singapore has a long-standing policy supporting data mobility and free data flows across borders.
However, these rules are not static and are subject to constant evolution as governments reassess their data control policies. This poses significant risks for data center demand, as regulatory changes can affect the business environment.
Given the unpredictability of regulations in emerging markets and concerns about stable fiber and power infrastructure, foreign data center providers are increasingly forming partnerships with local firms. These partnerships often involve collaboration with local telecommunications companies, power providers, property developers, and conglomerates to secure essential resources such as power supply, land, and connectivity. Some countries may also have restrictions on foreign land ownership.
In return, local providers benefit from the technological expertise and experience of foreign partners in managing data center assets.
As the data center market grows, providers may be tempted to overspend, especially in speculative development projects without binding pre-commitments from customers. It is essential to maintain control over leverage and establish a sustainable funding structure, the report suggests. Construction costs during speculative development can add to leverage until revenue and cash flow start to materialize.
One long-term risk emerging with substantial investments in the region is the potential for overcapacity. This could lead to financial stress for providers with poor execution. VNET Group’s financial stress and the debt restructuring of Cyxtera Technologies 2023 illustrate this. Companies like Cyxtera and VNET, which lease most of their facilities, face limitations in sale-leaseback arrangements or securing financing when the funding environment tightens.
While ownership of data centers, including land, can eliminate renewal risk, offer financial flexibility for fundraising, and enable asset sales, the long payback period and the rapidly changing nature of emerging markets require careful consideration.
Balancing leverage and growth aspirations is crucial in a growing market, while overcapacity remains a long-term risk for the industry, according to the report.
