DATA centre (DC) real estate investment trusts (REITs) invest in facilities that store servers and other data-based equipment. To be both secure and reliable for the companies that rely on them, these data centres are required to have dependable power sources, top-notch security and state-of-the-art cooling equipment.

While DCs are a relatively newer asset class, their projected growth is exponential. Nearly every company and industry relies on data storage today from cloud-based software to Internet hosting and even artificial intelligence (AI) platforms.

In fact, DC REITs were the highest-performing REIT sector in 2020 and 2021 and show no signs of slowing.

Who are the main customers for DCs today?

Google is by far the largest consumer of data; Microsoft, Facebook, governments, and healthcare conglomerates are also massive consumers.

The growth leaders in data capacity demand include eCommerce providers like Amazon, Tencent, Alibaba, video-on-demand services like Netflix, Hulu, Disney and Amazon Prime, social media sites like Facebook (now Meta), Twitter, Instagram and Snapchat, and chat channels like WhatsApp, Messenger and Telegram.

Continued growth is expected to come from these same providers but also from evolving technologies, such as 5G networks , autonomous driving, the “Internet of things”, AI and the deepening trend toward cloud-based services required by the corporate world.

Global DC and cloud IP traffic is forecast to triple by 2021, with a projected compound annual growth rate or CAGR of 25% (CBRE: 2019). The colocation market grew 10% in 2018 and is expected to continue a similar trajectory for the foreseeable future (Synergy Research: 2019).

As the global economy becomes more tech-dependent, growth in and evolution of DCs is fundamentally necessary to the equation.

Malaysia has around 44 DCs of which 27% are foreign owned (Asean Investment Report 2020–2021).

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Most of the locally owned DCs involve foreign partnerships but are small and can’t qualify as hyperscale designs.

Malaysia’s DC market size is likely to reach revenues of over US$800mil (RM3.37bil) by 2025, up from US$500mil (RM2.11bil) in 2020. However, many are small and nowhere near the size of hyperscale facilities which are becoming the norm.

As of 2020, Malaysia had about 80 cloud service providers, and many of them are multinational enterprises.

The government is now focusing on improving readiness to support hyperscale DCs by improving the country’s telecommunication and network infrastructure and rolling out of 5G.

In December 2021, Singapore-based Bridge DC announced a 100MW capacity hyperscale DC in Johor with operations expected in the fourth quarter or Q4 of 2022 with the value of investment undisclosed.

In July 2021, China-based GDS Holding Ltd announced it will be building a hyperscale DC in Johor, with a bult-up of 242K sq ft and 54MW capacity.

Keppel Capital along with Alpha DC Fund had announced back in 2018 that they would be investing in a DC in Johor with no mention of investment commitments.

Hyperscale facilities provide businesses with a one stop shop for all their IT and capacity requirements. Built in a campus style design, hyperscale facilities allow organizations to build out further data centres quickly within the same location. This enables scalability of data storage and capacity rapidly to meet demand.

So, what’s stopping Malaysia from becoming the preferred DC hub in ASEAN?

There are three components in the making of Malaysia as a successful DC centre of Asia

1) Physical:

The physical components that facilitate DC construction are;

– Real Estate availability with infrastructure

Currently we lack dedicated DC parks around the country with sizeable land plots and comprehensive infrastructure.

– Submarine Cables

There are 23 Fibre Optic Submarine Cable Line Landing Points of which 21 are in Peninsula Malaysia. However, the government’s decision to revoke the cabotage exemption to foreign-flagged vessels to repair submarine cables led to

Tech Giants balking at this decision. As a result, the Apricot Subsea Cable System Project by Facebook and Google bypassed Malaysia. To bring more hyperscale DCs into Malaysia this cabotage issue needs to be addressed urgently.

– Dark Fibre

We have ample fibre capacity at 250tbps with ten suppliers vying for the business.

– Electricity

Malaysia, unlike Singapore has over 30% excess available electricity to support the development of DC hubs in the Peninsular.

– Water

Ensuring adequate water supply to potential new Data Centres in Peninsular Malaysia is crucial.

– Talent

Based on the Education Ministry’s statistics from 1997 to 2020, the average number of engineers produced per year by the local institutions of higher learning, excluding graduates from international universities is about 16,000, while data science enrolment at our Institutes of Higher Learning number at about 3,000 annually. Hence talent availability should not be an issue.

2) Economic:

– The top six members of ASEAN make up 95% of the opportunity for building up DCs in the region. Malaysia currently has the highest internet user per population at 84%.

3) Government Policy:

– The Malaysian government policies favouring digitalisation are the primary drivers for the growth of data centres and cloud services. Demand for data storage and managed hosting services in Malaysia is expected to grow rapidly because of the extensive internet penetration (84 per cent), the roll out of 5G services, focus on cybersecurity and data privacy, and the demand for co-location from cloud service providers.

If we look at the current landscape, we can see that Malaysia could capture the incoming flow of FDI earmarked for data centres provided we ensure that our incentives are on par with our neighbours, we solve the cabotage issue soon, availability of DC enabled real estate is addressed and approvals at federal and local government levels are smooth and seamless.

Will we see a Malaysian DC REIT soon?

I believe that it will take some time as the larger hyperscale facilities being built now will need to stabilise their operations. However, MREITs should start a dialogue with the current owners of DC’s (There are 44 assets available) and start exploring the possibility of acquiring these assets. Only when they can aggregate a sizeable portfolio of data centres could they spin them off into a separate DC REIT. The market is waiting.

Source: The Star, March 26, 2022