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Singapore well poised to keep lead as data centre hub
SINGAPORE has established itself as the leading data centre (DC) hub of South-east Asia (S-E A) in the past decade. According to Structure Research, revenue in the DC commercial market in Singapore amounted to nearly US$1 billion in 2014 and is expected to grow by around 20 per cent by 2016.
Demand has traditionally been driven by government agencies as well as large multinational corporations (MNCs) from the financial, telecommunications and IT services sectors. In recent times, greater adoption of cloud computing and the e-commerce boom have also led to a surge in demand from Internet startups and enterprises.
The increasing need for DCs has not gone unnoticed by the commercial real estate sector with almost 50 colocation providers in this small island-state. Last year also saw the successful initial public offering of Keppel DC Reit in December, the first data centre Reit to be listed in Asia and Singapore.
Given the strong demand, supply has accelerated in recent times. According to CBRE Research, more than 10 DCs have been completed in the past five years, taking the total to more than 50 as at end-September 2015.
This robust pace of supply growth is expected to continue with seven DC projects in the pipeline, providing an estimated 1.4 million square feet of DC space over the next three years. These completions are aligned with the government's vision to establish the country as an information and communication technology (ICT) hub with Singapore currently accounting for approximately half of the S-E A region's DC capacity.
WHY LOCATE IN SINGAPORE?
Singapore's success in attracting DC investments is underpinned by three core strengths.
Firstly, Singapore's robust infrastructure and high connectivity position it as a prime location for DCs. In this digital age where time is increasingly a deal breaker, millisecond delays in communication or flow of data can cause companies to incur huge costs.
For Singapore, these goals are in line with the Smart Nation Initiative and achieved through enhancing Internet of Things (IoT) development, construction of high-speed optical fibre networks around the nation and the establishment of Internet exchanges. Complementing these efforts are the 16 transnational submarine cables that are vital for international telecommunications and networks.
Secondly, policies and initiatives by the Singapore government have been instrumental in nurturing this sector to its current level.
The Republic enjoys a long-standing reputation as a vibrant financial centre with strong intellectual property protection. It is conducive for doing business, which has attracted a large number of MNCs to set up companies here.
In more recent times, Singapore's comprehensive yet business-friendly approach to data security, such as the Personal Data Protection Act, puts it one step closer to international data protection standards.
This clustering of international firms is one of the main attractions of locating DCs here. Demand for Internet traffic tends to be highest where businesses congregate, allowing operators to accumulate carrier density. This has proven the case for early movers in the market such as Equinix, Global Switch and Digital Realty, all of which have recorded strong occupancy rates.
Thirdly, the island-state's geographical location allows for certain inherent advantages. The low risk of natural disasters save for sporadic dry spells and small-scale floods has helped minimise the possibility of any disruption or downtime for DCs.
At the same time, Singapore's strategic position as the gateway to South-east Asia makes it an ideal location to set up DCs. The growth trends for data demand in this region are highly promising.
South-east Asia's Internet penetration stood at 29 per cent in 2014, trailing behind most major regions and the global average of 42 per cent. Smartphone ownership and usage might be growing at exponential rates but countries such as Thailand, Indonesia and the Philippines are far from saturation point (see chart above). This translates to significant untapped growth. DC operators located here benefit from Singapore's positive fundamentals and access to fast- growing data usage in the region.
While it is encouraging to see Singapore's dominance in the DC industry in S-E A, challenges still abound. One of the most commonly-cited difficulties in running a DC is the high cost of operation. Singapore's advanced economy and land scarcity push up land and labour costs.
Stiff competition has emerged within South-east Asia, with each country striving to own a slice of this lucrative sector.
Malaysia has been actively promoting itself as a viable alternative to Singapore with the creation of Data Centre Parks such as the Sedenak Industrial Park in Iskandar and Cyberjaya near Kuala Lumpur. Malaysia shares similar attributes with Singapore such as relative political stability and a natural disaster-free geography. Unlike the city-state, however, it has ample amount of land, competitive labour costs and access to cheap and abundant energy.
Other potential competitors include Indonesia and Thailand with their sizeable populations, relatively liberalised networks and reasonably functional infrastructure. Data volume is also growing at exponential rates in these two nations, fuelled by the widespread availability of smartphones and mounting usage of social media and cloud services.
Singapore's leading status in the South-east Asia DC market will be tested in the years to come. Hence, it is imperative that Singapore strives to retain its status as a premier DC hub in the region and capitalise on opportunities.
Space constraint is a constant challenge although this can be overcome either by constructing the DC with more storeys or going deeper underground, each with their relative pros and cons.
On the demand side, the island's ability to attract firms to set up businesses here will continue to play an integral role in the growth of the DC industry. Companies tend to source their DC needs in the same country where their headquarters are located for ease of business coordination and to reduce operational risk. But the real appeal lies in the permanence of these facilities. Due to the high capital investment required, companies will be more reluctant to shift their operations out of the country.
Hence, it is essential that Singapore maintains its first-mover advantage. Despite ranking ahead of South Korea and Hong Kong in terms of cloud adoption, Singapore still lags market leaders such as Germany and the United States and it has to continue to improve its cloud expertise and further develop the ecosystem.
Data-related services and applications need to be continually developed to encourage greater adoption of cloud technologies and services, especially among older and more change-resistant companies.
Despite the challenges, positive indicators abound. Alibaba's cloud computing arm Aliyun plans to set up a DC in Singapore and local real estate developer Kingsland Development is opening a five-storey DC that is close to full occupancy. These examples illustrate that the country continues to be a preferred destination.
Singapore can count on the fact that it is in excellent shape to manoeuvre the obstacles and capitalise on the demand that is only going to keep rising with the growth of cloud computing. Given the relative infancy of the DC sector in the region, CBRE Research believes that this niche market will continue to mature and grow at a robust pace over the next few years on the back of strong demand trends and lack of adequate supply.
- Desmond Sim is head of CBRE Research (Singapore & South East Asia), and Dylan Chua is an analyst at CBRE Research