HONG KONG -- Asian real estate investors are turning to rapidly expanding data centers as alternative investments amid a region-wide property slump.
Nearly half of property investors in the Asia-Pacific region are active or plan to be active in data centers this year, according to a recent real estate industry survey by U.S. think tank Urban Land Institute and PwC. They are now more bullish about their prospects than other niche property types, such as shared offices and student housing, according to the survey.
Data storage businesses around the world are expanding, fueled by the growth of cloud services, e-commerce and video streaming. The hottest market is in Asia, where Canada-based Structure Research predicts co-location revenue will surpass that of North America by 2020.
"We are seeing a lot of private equity investors and investment banks paying attention to this unique asset class," said Colin Galloway, APAC vice president at Urban Land Institute.
The promising returns have overcome concerns about the technical requirements of the facilities and the huge capital spending they entail. Cash yields can range from the mid-single digits to midteens, depending on development type and geography, according to Galloway.
On the other hand, skyrocketing property prices have pushed down profits from traditional real estate. Rental yields for Hong Kong's residential properties, for example, have hovered around 3% in recent years. "Anything that provides higher yield becomes attractive," said Galloway.
Real estate services company Colliers says that in Hong Kong, converting existing industrial buildings, which are often used as offices, storage space and wholesale stores, to data centers can lift rent average rents by more than 60%.
Asia's real estate market is cooling when the region is already struggling with a slowdown in China and the fallout from the U.S.-China trade spat. House prices in Hong Kong have dropped from mid-2018 as Chinese demand waned, and governments in Singapore and Thailand are tightening restrictions to contain financial risks.
As the market outlook darkens, data centers offer respite to battered property investors.
Real estate advisory JLL dubbed Singapore, Tokyo, Hong Kong and Sydney the "big four" markets for data center investment, thanks to their robust infrastructure, connectivity and ease of doing business.
Hong Kong and Singapore are particularly attractive because they are seen as relatively safe from natural disasters and due to their status as financial hubs, which translates to more demand from the financial services and insurance sectors. Japan is dominated by local players and Australia is less connected to the rest of Asia.
Singapore is likely to win a head-to-head competition with Hong Kong to be Asia's data center hub. Tech heavyweights like Google and Facebook have shifted their focus from Hong Kong owing to its dire land shortage and political uncertainty. Industry experts, speaking on condition of anonymity, acknowledged that Beijing's increasing influence is a concern when it comes to storing data in the semiautonomous city.
In 2013, Google called off its long-planned Hong Kong data center project, saying it needed "to focus on locations where we can build for economies of scale." It started building in Singapore and Taiwan instead. Facebook also broke ground for its first Asian data center in Singapore last year, citing supportive government policies that offered the land almost for free.
"Singapore's reputable rule of law, well-established tech cluster, and, most importantly, cheaper land provided by the government, have made it a more attractive location than Hong Kong for data center operators," said Denis Ma, head of research at JLL Hong Kong.
But Hong Kong is not out of the race. The city's chronic land shortage is unlikely to be solved soon, but global co-location data center players -- which provide services and facilities to third-party corporate clients -- will continue to expand in the territory.
"Hong Kong is still a very important strategic location for clients in East Asia," said Steven So, executive vice president of NTT Com Asia, one of the world's largest data center operators. In addition to easier access to the Chinese market, Hong Kong is well connected with other countries by submarine cables, which facilitates high-speed data transmission, he said.
"Sometimes Singapore is just too far away, and it serves Southeast Asian countries better," So added. NTT Com, which operates three Hong Kong data centers totaling 70,000 sq. meters, is seeking to expand by working with local developers who have land available.
But Hong Kong and Singapore's status as regional data center hubs may be challenged in the future. Indonesia, Vietnam, China and others are tightening regulations, requiring companies to store their citizens' data locally for security reasons. This could divert investment away from the big hubs.
