Winning the data centre gold rush in S-E Asia 

TO POWER multi-year trends in digitalisation and artificial intelligence (AI), South-east Asia has turned its attention to the build out of data centres. Over the next five years, key Asean cities such as Johor, Kuala Lumpur, Jakarta, Bangkok and Manila are looking to increase data centre capacity by 1.5 gigawatts and doubling it by 2028.

Such pivotal developments will have a profound impact on the transformation of economies and industries. Those pursuing data centre opportunities include data centre specialists, infrastructure funds, conglomerates, telcos and large-scale data centres, also known as hyperscalers.

In this instance, beneficiaries of this data centre gold rush are likely to be the “picks and shovels” – investors and businesses that are enablers of data centres, such as utilities, construction, infrastructure and tech hardware companies.

As enablers, they benefit from the auxiliary or ongoing needs of building or sustaining data centres, rather than being responsible for the day-to-day running of the facilities. They will be better positioned to ride the growth than data centre operators, who may be susceptible to price competition and lower rental rates as markets with already high vacancy rates see an expansion of data centre builds.

The exception is data centre operators in Singapore, whom we have identified as amongst the long-term winners. The city-state is expected to maintain a high 99 per cent utilisation for its co-location data centres in the next four years. This is on the back of limited upcoming capacity, while demand for new supply remains strong. Hence, we anticipate the high demand and limited capacity will result in pricing inflation and healthy ROI for data centre companies in Singapore. In addition, the Republic partially relaxed the moratorium it had on building new data centres, and in our recent channel checks, we similarly find industry participants indicating an uptick in data centre rentals. With recent second quarter earnings announcements, one operator disclosed that a major contract renewal will fetch a rental increment of more than 40 per cent.

ESG credentials could also be a key differentiator for data centre demand and returns on investment – and here is where we also see Singapore having an advantage, with major players achieving high energy and cooling efficiency for their data centres.

Across the straits in Malaysia, Johor has emerged as the largest data centre hub in the country. According to our analysis, Malaysia has ample planned water treatment plant additions to accommodate expected data centre builds. Given that Johor could accommodate about three times the current planned data centre additions until 2028, we do not see the availability of water as a near-term barrier for continued data centre deployment.

Overall, Malaysia is one of the least water-stressed countries in Asia. This, coupled with its natural endowment of power sources, also positions the country well as a data centre host in the region. However, the supply of treated water could prove an issue should capacity additions not materialise, or water supply interruptions exacerbate variability in the system, which could introduce an element of competition with the high domestic water user base in Johor.

Elsewhere in Asean, infrastructure builds are expanding, taking on multiple dimensions. Vietnam is opening its data centre industry to foreign investments. Thailand seems, too, to be promoting the country for data centre and cloud investments. And alongside Indonesia and the Philippines, both Thailand and Vietnam are also increasing investments in submarine cables, which are critical for the international connectivity that would drive more data centre builds. In addition, the Philippines is reportedly planning a 300-megawatt data centre campus.

As such, we believe that the data centre industry could continue to see elevated deal activity with regional companies seeking growth capital, technology, expertise, and clients; and global investors seeking access to a rapidly growing market.

Corporates, infrastructure funds and private equity funds are increasing their capital deployment to tap into the opportunities. Deal activities are likely to take the following forms: 1) investments to build regional digital infrastructure, 2) partnerships to bring technology to the region, 3) regional companies bringing global strategic investors to help grow their data centre business, and 4) regional partnerships between data centre operators.

Geopolitical developments and market volatility notwithstanding, we believe that if investors and businesses can seize the right opportunities, the data centre gold rush has the potential to accelerate the region’s digital and AI transformation.

The writers are from JP Morgan. Ranjan Sharma is the firm’s head of Asean TMT equity research and Hannah Lee is head of Asia-Pacific ESG equity research