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The global artificial intelligence (AI) race is intensifying as companies compete to dominate the AI market. Dominant players, including Microsoft and Alphabet (Google), are investing billions of dollars in it. This has led to the booming data center industry, presenting it as an attractive investment opportunity.
In Part 1 of this two-part series, we discussed the rapid growth of the data center industry, fuelled by AI advancements and increasing digital needs. While data centers are critical to this technological boom, their massive energy consumption poses significant environmental challenges.
Industry leaders are adopting energy-efficient technologies, renewable energy sources, and sustainable practices to mitigate their carbon footprint, but the path to fully green data centers is still evolving.
In this article (Part 2), we will delve into the finance side of this transformation. We will start by understanding why investors are pouring money into data centers, the attractiveness of Southeast Asia as a data center location, and Singapore government’s efforts to encourage the construction of green data centers. Then, we will move on to the financing options available to fund the immense capital required to build these facilities sustainably.
Investing in Data Centers
Why is the data center business booming now? There are 3 main reasons:
Huge demand: With the increasing demand for AI, cloud computing, cryptocurrencies, e-commerce, and other IT services, data center demand is expected to remain strong.
High barriers to entry: The significant capital investment required to build and maintain state-of-the-art data centers creates high barriers to entry, reducing competition and allowing established players to capture substantial market share.
Predictable cash flow: While there are many types of data center business model, data centers typically operate on a subscription-based model. Data center owners/operators usually charge rents and fees for power capacity (kw), server and equipment rent, maintenance fee, etc.
Furthermore, there’s typically high retention rates for data center customers due to the high switching costs. Moving data from one data center to another is complex, time-consuming, and may lead to potential downtime. Hence, data center services often involve long-term contracts, ensuring a stable and predictable revenue stream.
Data Migration to Southeast Asia
While nearly 2,000 of the world’s 7,000 data centers are in the United States, America isn’t the only region experiencing significant growth. Southeast Asia is quickly becoming a key player in the data center landscape. Microsoft, for example, recently announced billions of dollars in data center investments in Indonesia, Thailand, and Malaysia. Microsoft is not alone; they’re joined by other major tech companies looking to expand their operations in the region.
In this article, we’ll focus on three countries—Singapore, Japan, and Malaysia—that are becoming central to the future of data centers in Southeast Asia.
Singapore and Japan: The Prime Locations
Singapore and Japan have been considered as ideal locations for data centers since years ago due to several key factors:
Reliable power supplies and telecommunications networks: This is crucial as data centers must operate continuously to avoid downtime and data loss.
Political stability: With the ongoing geopolitical tensions, neutral countries are favorable for long-term business continuity.
Government support for data centers: For example, Singapore offers GST reliefs on data center equipment imports, while Japan provides subsidies for data centers built outside the entire Tokyo area
Skilled workforce: Their highly skilled talent pool is crucial for managing and maintaining complex data center operations.
That said, growth opportunities in these markets are becoming more limited. Japan already has a mature data center ecosystem, while Singapore faces constraints due to its limited land availability.
Malaysia: An Emerging Hub
Malaysia’s Johor is the faster growing data center market within Southeast Asia. This area is popular due to its proximity to Singapore, major financial and tech hub, while offering cheaper and more reliable resources compared to nearby locations.
To streamline entry into this market, Malaysian authorities have established a one-stop center to expedite coordination and permit approvals. In 2023, they also introduced the Green Lane Pathway, which enables data center investors to receive power supply within 12 months, compared to the typical 36-48 months.
However, the massive demand for power and water from data centers has raised concerns. In recent years, Johor has experienced water shortages and power outages, challenging the region’s ability to sustain this rapid growth. In response, the Malaysian government is working to improve Johor’s water and power infrastructures. These efforts include investing in renewable energy sources and exploring the usage of desalination.
Other parts of Malaysia—such as Klang Valley, Penang, Kedah, Sarawak, and Cyberjaya—are also home to data centers. Unlike Johor, though, these data centers are primarily focused on serving the domestic market rather than attracting multinational corporations.
Singapore’s Government Action
Singapore is leading the way in promoting sustainable data center practices through its "Green Data Center Roadmap," which outlines strategies for reducing the carbon footprint and enhancing the energy efficiency of data centers.
The roadmap highlights best-in-class data centers, such as those operated by ST Telemedia Global Data Centres and Equinix, which have implemented advanced cooling technologies, energy-efficient hardware, and renewable energy sources to set benchmarks for the industry.
A cornerstone of the government’s action is the Data Centre - Call for Application (DC-CFA). After lifting the temporary data center growth pause in 2022, IMDA launched the pilot DC-CFA to manage the country’s data center growth sustainably.
DC-CFA works by inviting companies to submit proposals for innovative and sustainable data center projects. Applicants are evaluated based on various criteria, including energy efficiency and their ability to support Singapore's economy. The pilot DC-CFA received more than 20 proposals and awarded 80MW to Air Trunk, Byte Dance, Equinix, GDS, and Microsoft.
Financing Options for Data Center Development
One significant challenge in constructing data centers is the substantial capital expenditure involved.
Financing choices are unlimited, but for data centers, there are three relevant types of financing, briefly outlined below
Basic corporate finance: Loans or bonds issued based on the corporate’s financial strength and/or collaterals.
Asset-backed securitization: For data center operators, the assets would be the contracts with tenants that pay rents by usage of power capacity (kw). The securities created will be backed by the cash flows generated by the contracts. When contracts are long-term with big tech companies as tenants, this arrangement could be straightforward and relatively low risk.
Project finance: Similar to ABS, project finance is also reliant on the cash flow generated by the data centers. However, project finance is focused on financing the construction processes requiring huge amounts of capital and a long timeline.
Green Finance for Data Centers
In addition to the conventional financing options mentioned above, data centers incorporating sustainability features can also tap into green financing options. There are various types of green financing available, but the relevant ones for data centers are green bonds, green loans, sustainability-linked bonds, and sustainability-linked loans.
Proceeds from green bonds and loans are earmarked specifically for funding environmentally sustainable projects. As for sustainability-linked bonds and loans, companies have complete freedom in the usage of proceeds, but interest rates will be adjusted upwards if the sustainability key performance indicators agreed are not achieved on time.
Green financing enables companies to access funds at lower costs while enhancing their sustainability credentials. However, these instruments usually have external audit and reporting requirements for transparency and credibility, leading to high administrative and compliance costs.
Digital Realty’s Green Finance Strategy
Green financing, especially green bonds and sustainability-linked loans, are increasingly being used to fund data center construction.
Digital Realty, for example, has been utilizing green finance solutions since 2015. It has established a Green Bond Framework based on ICMA’s Green Bond Principles and issued over $6 billion in green bonds. This boosts Digital Realty’s reputation by demonstrating its commitment to sustainability and environmental responsibility, while enjoying cost savings due to green bonds’ potential lower interest rates and tax incentives.
Conclusion
In summary, the data center industry presents strong investment potential due to the rising demand driven by AI, high barriers to entry, and the stable cash flows generated by long-term tenants. Furthermore, Southeast Asian countries such as Japan, Singapore, and Malaysia have emerged as prime locations for new data centers.
To address the substantial capital requirements for constructing green data centers, companies are increasingly turning to green finance options, such as green bonds and sustainability-linked loans. Through green financing, green data center operators can access funds at lower costs while enhancing their sustainability credentials.
Disclaimer:
The information provided by REANGLE in this article is for informational purposes only and does not constitute investment advice. Any investment decisions made based on this information are solely the responsibility of the investor. REANGLE disclaims any liability for financial losses or legal consequences resulting from investments in any companies or assets discussed in this article. Readers are advised to conduct their own thorough research and seek professional financial advice before making any investment decisions.
REANGLE Services
REANGLE extends its Green Finance Consulting services to institutional investors and corporations across Southeast Asia, Japan, and beyond, harnessing Singapore’s pool of talent. With global sustainable finance platforms and highly motivated green talent, REANGLE delivers Green Finance Analysis and Green Data Analytics services quantitatively, alongside providing Green Investor Relations advisory service to drive authentically sustainable investment decisions.
Do check out REANGLE’s past articles for further clarification or reach out to us at kazu@reangle.co (Kazu Watanabe).
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