The explosive growth of the data center market in Asia Pacific as an alternative asset class is investigated in our latest Winning in Growth Cities report. Download the report to find out more.
The hype around data centers as a viable alternative asset class has come under focus in recent years. Exponential growth of data from the heavy use of technology has led to increased demand for data center suitable land sites across Singapore.
Investors are generally interested in two options: Brownfield sites and greenfield sites. Brownfield site is land that was previously used for other industrial purposes before being considered for building data centers. In contrast, Greenfield site is previously undeveloped land.
Brownfield sites are being sold 20 per cent to 25 per cent above valuation. Data center operators are eager to land their hands on a re-purposed high specs data center that is completed six months earlier than a typical greenfield development. These are typically existing structures which have high floor to ceiling heights, strengthened floor loadings, and available power in the premises.
The premium on a purpose-built data center is even greater, at 40 per cent to 50 per cent above valuation, as operators and end users can occupy the premises immediately, averting risks associated with construction.
Singapore has always been favored by data center operators for the speed at which data is transmitted, supported by the infrastructure around the sub-sea fiber network provided very early on at the cusp of the data center evolution in the Asia Pacific region. In a study by Cushman & Wakefield last year, Singapore ranked the most robust market out of 10 Asian countries in terms of business operations for data centers. It has been a viable choice as bridge between Asia-Pacific and the global markets.
Assessing the Data Center Ecosystem
The data center market thrives in a healthy eco-system of a diverse market place of major and minor players, powered by a sophisticated and mature system of sub-sea fiber cables to facilitate the storage and transmission of huge amounts of data. This is critical for operators who need to ensure clients’ data needs are catered to, to minimize the risk of data loss, data breaches and the ability to respond swiftly to any breakdown in data transmission.
The rise of the digital economy and the attendant sectors of Artificial Intelligence and Fintech will keep the demand for cloud steady. Singapore should be able to continue to attract data center operators to co-locate in Singapore if costs remain affordable. In fact, many cloud operators have begun to exercise a lot more flexibility for users to keep balance sheets healthy. Lease terms are now structured on a shorter term, at between three and five years in an attempt to mitigate the risks involved in relocating and decommissioning equipment. Paying per use is gaining popularity among users. The pay-per-use model gives operators the flexibility to turnaround in as short a time as a month in advance; to up-size and downsize the space needed. The upshot of a flexible and payment term is that operators do not have to amortize fixed assets, ensuring that balance sheets are kept healthy.
How sustainable Singapore’s status as a favorable destination for data center operators remains depends on the ability for the republic to respond to the tidal wave of demand for data in the wake of massive digitization, the level of maturation of cloud platforms.
Given the attractiveness of data centers as a key economic pillar, national lawmakers have also gone out of their way to make their countries attractive to operators.
Within the region, South Korea has several national acts to promote its data center industry, including its Cloud Computing Act (2015), and National Information Basic Act (2015), followed by its Data Center Industry Promotion Policy (Dec 2017).
Closer to home, Thailand has one of the most aggressive plans among Asian countries to attract data center operators. Eligible operators enjoy corporate tax exemptions of a cap of up to eight years, and an additional five-year reduction of 50 per cent, exemption of import duties on machinery, among other incentives for qualifying operators under its Investment Promotion act and Competitive Enhancement Act.
Ireland, Dublin is another hot spot. It boasts one of the lowest latency transatlantic cables from Europe to the US and its corporate tax rate is 12.5 per cent, far lower than Finland at 20 per cent, Denmark at 22 per cent or Norway at 24 per cent. It also has one of the most effective marketing alliances under the Host in Ireland Initiative.
Besides Ireland, the Nordic countries in Northern Europe also stand out for the sound ecosystem it provides data center operators.
Their well-fortressed markets, along with minimal utility taxes sharpens their competitive edge in the global data center world stage. The Finnish government is also collaborating with the Chinese government on joint efforts for 10,000km of fiber-optic link across the arctic circle. This is expected to reduce the latency between China and Europe by half.
Added to these, the fact that the data centers are located in cooler temperatures helps operators save on utility costs. Other data center hubs looking to compete for operators are stacked against these very attractive alternative locations.
The attraction of the Nordic markets is hard to ignore. Denmark has reduced the corporate green energy tariff on electricity and is transitioning to its full removal by 2021. Norway also offers a full suite of tax incentives as part of the country’s overall plan to establish itself as a Data Center hub and is looking to remove data center machinery tax as a top priority.
The pro-business tax structure in these markets will inevitably cast the spotlight on the costs involved in setting up data center in Singapore.
Singapore proposed an amendment in 2017 to the Property Tax Act which would result in significantly higher taxation for data center operators in Singapore. This is on top of the fact that Singapore has one of the highest costs in the region for data center operators, in terms of electricity, manpower and construction costs.
It was only after much consultation with the local data center operators that this amendment was postponed to allow the authorities to study the amendment further.
Facebook’s choice of Singapore to build its first data center in Asia is a powerful testament to Singapore’s fundamentals, and should encourage all players to shore up its status as a data center hub. But we should not ignore the fact that Singapore is in fact competing on a global scale for data center operators.
To find out more about the investment opportunity presented by the data center market, download our Winning in Growth Cities report now.