Asia Pacific Data Center Trends
The growing importance of cloud computing, 5G,Big Data and Internet of Things have seen data centres take on increasingly important roles not only in corporate settings, but in our personal lives too. This trend has only been further accelerated by the Covid-19 pandemic, with the increase in remote working, online learning, shopping, and even social gatherings online at times. Datacenters play an important role in this ecosystem and are home to cloud service providers enabling these types of services. They account for a significant portion of total data centre capacity uptake.
Top-10 cloud providers, including Amazon, Microsoft and Google have recently seen substantial (up to 700%) increases in demand for their services, whilst network operators are reporting a 20-30% surge in internet usage, and communication vendors like Zoom, WebEx and Cisco are reporting more than 100% increases. It is expected that a substantial part of these capacity requirements will remain. This will lead to further expansion of their infrastructure and thus increase data centre demand. In the short term this may create its own set of challenges given the already present supply / demand imbalance, long(er) lead times as a result of and disruption of the global equipment supply chain, and construction during the global lock down may result in delays of capacity coming online.
Operators that were able to take on a higher level of speculative risk in the process have an advantage over operators that took on a more conservative approach as speed to market has become even more key in winning large customer contracts.
To give some reference, the top-10 global cloud providers spent USD66bn in 2019 (a 3% increase over 2018) of which capital expenditure related to datacenters consumed the largest share of their spending.
Asia has historically lagged behind the US and Europe in terms of cloud adaptation, but it has picked up the pace rapidly over the last few years. Tier 1 markets in Singapore, Hong Kong, Tokyo and Sydney have all experienced a tremendous amount of growth in recent years (with 75% additional capacity coming online over the coming 24 months), and new demand requirements for cloud coming from tier 2 locations like India, China, Korea and Indonesia. Updated data sovereignty regulation also plays an important role in this respect.
Other than established operators such as Equinix, Digital Realty and Global Switch, new capital has found its way into the sector in the region with private equity / infrastructure funds investing and setting up platforms to capture the growth opportunities. Some examples are; Bain with Bridge / Chindata, Warburg Pincus (Princeton Digital), a MIRA consortium which has recently acquired 88% of Airtrunk from its initial investors Goldman Sachs and TPG, and Brookfield, which acquired DCI from Blackstone in 2018. Investor appetite in data centres continues to be strong and there has been an increased focus from investors as the critical nature of this type of infrastructure has become (even) more obvious during the pandemic.
Regardless of the supply/demand imbalance, pricing is relatively competitive across the board and has come down as datacenter operators continue to aggressively take market share. Conversely, for the right location with sufficient power, water and fiber availability, prices have actually increased; valuation expectations have increased at the same time, and build versus buy strategies have come more to the forefront.
Natixis has historically played a very active role in the datacenter sector on a global basis. In Asia it has been a front runner with active roles in the acquisition of CDC by Morrison (Mandated Lead Arranger and Bookrunner), the original investment of Goldman Sachs/TPG in Airtrunk and its subsequent expansion in Singapore as debt advisor, hedge advisor and Mandated Lead Arranger, Underwriter and Bookrunner, as well as the acquisition of DCI by Brookfield as MLAUB and hedge provider.
At present, we are actively seeking capital for a datacenter venture in India as well as doing early work in Japan and Korea for greenfield data centre opportunities for different investors. This previously niche industry has become more commoditized over time, but given large capex requirements and flexibility requirements due to a demanding client base, an in-depth understanding of the business is required when raising capital – Natixis can draw on global industry expertise with deep understanding of local market requirements, has extensive greenfield experience and competitive underwriting risk appetite.