Hong Kong data centres represent a good investment opportunity, as demand for data grows amid lockdown measures, 5G roll-out

The current pandemic has increased demand for data services. The closure of schools, work-from-home policies and social distancing are placing a greater demand on web-based platforms that support online meetings and classes. And while Hong Kong’s real-estate market as a whole faces price and rent corrections, the data centre market has a strong outlook and is likely to attract more investors looking for an upside. Data centre rents will continue to go up by 4 per cent in 2020, and yields will stay in the 3.5 per cent to 4 per cent range, which is more attractive compared with other sectors. More interestingly, data demand from the introduction of fifth-generation wireless internet coverage in Hong Kong will exponentially grow the underlying need for storing and processing data. As such, data centre and cloud services operators are actively looking for more space in Hong Kong. To capture this opportunity, investors can choose between strata title industrial buildings, en bloc industrial buildings or redevelopment. Strata title industrial buildings can be repurposed for data centre use by obtaining a special waiver, which is handled by the tenant. As fitout and basic infrastructure such as chillers, power substations and generators are the tenant’s obligation, a landlord’s required investment is minimal. However, obtaining licences for basic infrastructure location from other strata title owners, or property management companies, is a landlord’s obligation. Given the significant initial capital expenditure required from tenants and operators, these buildings require a secured lease of at least 10 years. However, not many individual landlords are willing to, or are able to, accommodate such a long-term tenancy. While this option provides a quick return with lower capital investment, many industrial units might not meet operational requirements, such as ceiling heights and limitations on cable and duct installation. There is also the risk of forceful redevelopment by other majority owners in older buildings. The conversion of existing en bloc buildings, or whole buildings under single ownership, can also be carried out with a special waiver, giving more flexibility to repurpose building features such as cargo lifts or parking floors, and providing good yield for shell and core without significant costs, but with some additional complexity. High data centre rents have allowed three firms to dominate US$883 million Hong Kong market The key here is finding a larger operator that can occupy the whole building as an anchor tenant, as premium data centre operators will seldom want to be located within the same building or even in proximity with other operators, which means the en bloc building needs to be occupied by a single operator. As there are only a handful of these larger operators in the market, it is crucial for the landlord to carefully negotiate terms with potential tenants. This option also requires the landlord to secure approval for increased power supply from CLP Group or Hong Kong Electric, adding uncertainty around time frame and feasibility. We recommend investors discuss this with power companies in advance before reaching out to potential tenants. The redevelopment of sites allows for a build-to-suit, higher quality data centre. As this allows for more tailor-made and efficient building features, the landlord can attract larger operators with better terms. Industrial lots can also enjoy a 20 per cent additional bonus plot ratio, based on Revitalisation Scheme 2.0, subject to Town Planning Board clearance and land premium if any. This gives investors more attractive development options. Although new government industrial land sale sites allow for both industrial and technology and telecommunications uses, the original structure for such designations dates back to the 1830s, long before any modern uses could be foreseen. As such, building a data centre on industrial land requires lease modification, for which premium assessments can be as high as HK$3,000 (US$387) per square foot on maximum permissible gross floor area. Assuming typical industrial land values range from HK$4,000 to HK$6,000 per square foot, this raises upfront costs significantly and puts pressure on potential rewards for development, as well as raising rents, which tenants will be expected to pay upon completion. This makes the high cost of land the biggest obstacle to overcome for investors. Data centres represent a promising niche market, with some special requirements that need to be carefully analysed. Given its higher potential yield and less volatile performance through times of uncertainty, they represent an attractive opportunity for long-term investors. Given the continually growing demand for cloud-based services and proactive government policy support, investors should keep a close eye on the industrial market for sites to be converted or redeveloped. Hannah Jeong is head of valuation and advisory services at Colliers International

Hong Kong data centres represent a good investment opportunity, as demand for data grows amid lockdown measures, 5G roll-out

.css-1mniedq{color:inherit;font-weight:inherit;font-size:inherit;font-family:inherit;line-height:inherit;} Data centre rents will continue to go up by 4 per cent in 2020 Data demand from the introduction of 5G will exponentially grow underlying need for storing and processing data

Data centre rents will continue to go up by 4 per cent in 2020

Data demand from the introduction of 5G will exponentially grow underlying need for storing and processing data