Data centres in demand as supply evaporates
In the world of tech, when you use the cloud, you are simply storing your data and programs on the internet instead of in your computer. For example, data from your Facebook, Instagram or Gmail accounts are stored in the cloud, which is located in data centres.
Singapore has attracted several tech companies to set up data centres in the city state. In an August report, Cushman & Wakefield says: “Facebook set up its US$1 billion [$1.4 billion] data centre in Singapore. It would be its first in Asia and 15th in the world. We also saw Equinix, Digital Realty, ST Telemedia and at least two other operators having successfully tendered for land plots from Jurong Town Corp to build data centres.”
Singapore is an attractive place to have a data centre because of infrastructure such as improved high-speed connectivity as well as political stability, rule of law, regulations and a low risk of natural disasters relative to other countries. Data centres occupied 241,000 sq m in 2017; an estimated 65,000 sq m of data centre space was completed in 2018, and total stock is expected to more than double by 2022, notes Mapletree Investments in its July Mapping publication.
Growing data creation and storage, the proliferation of the internet of things and increasing demand for cloud-based storage are all reasons that data centre demand is likely to continue. In addition, the introduction of data privacy laws, regulatory and compliance requirements for data security and data protection regulation are attracting corporates to store data locally. All these factors make Singapore a compelling data centre hub.
But Singapore’s success is now a double-edged sword. In his National Day Rally Speech on Aug 18, Prime Minister Lee Hsien Loong said Singapore needs three things for survival: to understand, mitigate and adapt to climate change.
What does mitigating climate change mean? “It means we must do our part to reduce CO2 emissions. Singapore has joined international efforts to reduce emissions. We are part of the Paris Climate Agreement, and we have committed to slow down and ultimately cap our CO2 emissions by around 2030. To help achieve this, we introduced a carbon tax last year,” Lee said. The carbon tax was implemented on Jan 1, 2019 and organisations have until June 30, 2020 to report their CY2019 emissions.
One of the largest contributors to carbon emissions are data centres. The Global e-Sustainability Initiative estimates that data centres account for 3% of the world’s electricity use and 2% of its greenhouse gas emissions — a carbon footprint equivalent to the global aviation industry.
The Netherlands, another signatory to the Paris Climate Agreement, is also a popular location for data centres. In June, Google parent Alphabet said it would invest €1 billion ($1.5 billion) to expand its data centres in the Netherlands. A new facility will be built in Agriport, about 30 miles north of Amsterdam, and an existing site farther north, in Eemshaven, will be expanded. Alphabet also has a state-of-the-art data centre in Jurong.
In July, Bloomberg reported that Amster
dam is hitting the pause button on new data centres because of the strain on its property market and power networks. The suspension of approvals is to ensure that data centres occupy as little space as possible and fit well with the environment, the government said. According to Bloomberg, a third of Europe’s data centres are in and around Amsterdam
The Netherlands ranks 14th on the Cushman & Wakefield Data Centre Competitiveness Index 2019 (see table). This index is based on a detailed analysis of success factors across 38 countries and cities. Singapore is ranked third globally after Iceland and Norway, and first in Asia-Pacific.
Data centre supply shortage
“By 2020, about 12% of Singapore’s electricity demand is likely to be from data centres as the sector continues to expand,” Cushman & Wakefield says. “Singapore has pledged to reduce carbon emissions by 36%, based on 2005 levels under the 2015 Global Paris Agreement. As such, the likelihood of obtaining regulatory approvals to convert green- or brownfield industrial sites into data centres will be limited. The next and probably last wave of data centre supply to hit Singapore will be in the second half of 2020, at approximately 150MW, bringing total supply in the market to slightly over 500MW.”
This could lead to a supply crunch. “Industrial S-REITs (except Keppel DC REIT [KDC REIT], where reduction of carbon emissions is tightening data centre supply) sounded less upbeat on industrial rents and demand,” notes Citi in a real estate investment trust round-up research note on Aug 27.
Cushman and Wakefield adds: “The government’s effort to become a Smart Nation also boosts demand for data storage and servers. In such a climate, owners of existing data centres in Singapore can expect a relatively rich premium on existing assets.”
At a REIT forum last month, Dennis Yeo, CEO of Cushman and Wakefield Singapore and Southeast Asia, said: “If you want to buy a data centre in Singapore, there are none. The government already has a plan to restrict new data centres.”
REIT managers have also articulated that the regulatory approval processes have become more selective, given the need for access to sufficient power and connectivity. During KDC REIT’s 1HFY2019 results briefing, analysts were told that supply in Singapore could be tightened.
“The government, [since] March, has stopped providing land for data centre expansion because it is studying the impact of data centres on carbon emission,” says Adrian Chui, CEO of ESR-REIT’s manager. “As landlords, we know that demand is there and, as a REIT manager, we have to look at rules and see how we configure our assets.”
ESR-REIT, which owns 56 properties valued at $3.03 billion, has a data centre operator at its Viva Business Park property, and also an incoming data centre operator tenant at 7000 Ang Mo Kio 5.
Mapletree Industrial Trust (MINT) owns 87 properties in Singapore, of which five are data centres, and a 40% stake in a portfolio of 14 freehold data centres in the US, with sponsor Mapletree Investments owning the remaining 60%.
“Data centres offer income stability for MINT, as they typically come with high-quality tenants, long leases and locked-in annual rental escalations,” Tham Kuo Wei, CEO of MINT’s manager, is quoted as saying in Mapping.
MINT’s first two data centres in Singapore, 19 Tai Seng Drive and STT Tai Seng 1 (formerly known as Tata Communications Exchange), were acquired and developed by Mapletree Investments, before being included in MINT’s initial portfolio for its listing in October 2010.
“We are keen to develop more build-tosuit data centres in Singapore such as the recently completed projects: Mapletree Sunview 1 in July 2018 and the upgrading of 7 Tai Seng Drive into a data centre in July 2019. This is in line with our strategy to build a portfolio of assets of higher-value uses,” a MINT spokeswoman says. Mapletree Sunview 1 and 7 Tai Seng are MINT’s third and fourth data centres respectively. Its fifth is a build-to-suit development at 26A Ayer Rajah Crescent and Equinix’s flagship data centre, which was completed in January 2015.
Impact of carbon tax unknown
Despite continuing to grow its data centre portfolio — 8.6% of its portfolio value of $4.8 billion comprises data centres in Singapore and 9.1% in the US — MINT’s electricity consumption and emissions have fallen. Its total building greenhouse gas (GHG) emissions in tonnes carbon dioxide equivalent fell 4.4% y-o-y to 16,974 for the 12 months to March 31, compared with 17,761 tCO2e a year earlier (FY2017/18).
Singapore’s carbon tax will be applied on facilities that emit more than 25,000 tCO2e of emissions annually, and cover the six GHGs that Singapore currently reports to the United Nations Framework Convention on Climate Change. Singapore’s carbon tax is set at a rate of $5 per tonne of GHG emissions (tCO2e) from 2019 to 2023. Hence there is unlikely to be any impact on MINT’s distributions per unit for the current calendar year.
The REIT has announced plans to re
duce electricity consumption. MINT’s target for FY2020 ending March 31 is to reduce average building electricity intensity by 1% y-o-y for the existing portfolio, from the base year of FY2019.
Total building electricity consumption of MINT’s properties in FY2018/19 was 40.5 million kWh, 3.2% lower than 41.9 million kWh in FY2017/18.
Increasingly, MINT’s data centres in Singapore are using photovoltaic or solar cells to produce power. “The [data centre] sector is starting to take note of emissions and build more environmentally sustainable data centres. MINT’s build-to-suit data centre for Equinix at 26A Ayer Rajah Crescent has energy- and resource-efficient features such as the adoption of an innovative green construction system that reduced concrete usage during construction, the use of recycled NEWater for cooling towers and motion-activated LED lights, as well as the installation of photovoltaic systems at the rooftop and façade to harness renewable energy,” says Mapletree Investments in its July Mapping report.
The Ayer Rajah Crescent data centre was awarded the BCA-IDA Green Mark for New Data Centres (Platinum) by the Building and Construction Authority and the Infocomm Development Authority for data centre developments in Singapore. The facility also achieved the Leadership in Energy and Environmental Design (LEED) Gold certification from the US Green Building Council, which was also secured by the facility at STT Tai Seng 1.
Lowering emissions
Elsewhere, KDC REIT’s properties emitted 139,888 tonnes of GHG in FY2018. While GHG emissions rose 28% y-o-y, excluding assets added to the REIT’s reporting scope in 2018, energy and water saw some reduc
tion in consumption levels.
In addition, the REIT has a geographically diversified portfolio. As at Dec 31, 2018, KDC REIT owned 16 data centres valued at $2 billion. Of this, 51.8% was in Singapore, 14% in Australia and the rest divided between Ireland (10%), the Netherlands (6.9%), Germany (6.7%), the UK (6.4%), Italy and Malaysia. Some geographies such as the European Union and Australia have already introduced a carbon tax and an Emissions Trading System.
At any rate, KDC REIT is taking steps to lower energy consumption and emissions. “Keppel DC REIT is currently exploring the possibility of building floating data centres in Singapore,” says Panchaksharam Thirumalavan, manager, projects and consultancy, building engineering solutions, at C&W Services.
The REIT has announced a “tech-refresh” strategy for key equipment including chillers, cooling towers, diesel rotary and uninterruptible power supply devices to improve energy performance and lengthen the life span of equipment. In Ireland, KDC DUB 1 is undergoing upgrading works, to be completed in 2020, to enhance energy efficiency.
In its 2018 annual report, KDC REIT’s manager says while overall electricity usage is expected to increase as the REIT’s asset base grows, it will continue to implement initiatives to optimise energy efficiency and usage intensity. In addition, GHG emissions should be reduced through the use of electricity generated from renewable resources. This measure has already been implemented at the Gore Hill DC in Australia, and KDC DUB 1 and KDC DUB 2 in Ireland.
MINT also plans to grow its portfolio of data centres. “MINT will leverage the sponsor’s extensive network and capabilities to evaluate suitable investment opportunities in the worldwide data centre sector beyond Singapore,” the MINT spokeswoman says. “In addition to Singapore and the US, we will also explore established data centre markets in Asia-Pacific and Europe. We envisage overseas data centres to comprise about 30% of MINT’s assets under management.”
KDC REIT announced a distribution per unit of 1.93 cents in 2QFY2019, which would translate into 7.72 cents for a 12-month period. CGSCIMB forecasts DPU of 7.9 cents for this year, or a yield of 4.3%. Units in KDC REIT are trading at a 72% premium to their net asset value of $1.06 as at June 30. CGSCIMB downgraded the REIT after its 2QFY2019 results on valuation grounds.
MINT reported a DPU of 3.1 cents in 1QFY2020, up 3.3% y-o-y. This would translate into a yield of 5.2%. Units in MINT are trading at 1.56 times its NAV of $1.52. MINT’s expansion plans include the possible acquisition of the remaining 60% stake of its US data centre portfolio owned by Mapletree Investments, and the redevelopment of an existing property, its Kolam Ayer 2 Cluster, into a high-tech industrial precinct. The property is pre-committed for 15 years and will be completed in 2022.
With demand for data centres rising as data storage needs multiply and supply falling, the premiums to NAV at which MINT and KDC REIT are trading are unlikely to abate anytime soon.