_ Q&A with Fred Fitzalan Howard on insights into the booming data centre market in APAC

Q: Global data centre transaction volumes saw a 118% increase in 2024. What's driving this extraordinary growth?

Fred: Growth in our sector can be attributed to two key factors. The industry has existed since the 1990s—every click, swipe, and tap on your phone or laptop ultimately runs through a data centre. But in the last 5-7 years, growth has been driven by two significant developments.

First is the emergence of cloud computing as the most beneficial place for companies to store their data. Contrary to popular belief, the cloud isn't where data floats in the sky. Platforms such as Microsoft Azure, Amazon Web Services, or Google Cloud need to function, and enormous amounts of data centre capacity must be developed.

Since COVID-19, businesses have recognised that outsourcing data storage to companies such as Microsoft and Amazon is far more cost-effective and flexible than maintaining servers within office buildings. This realisation is driving immense growth in data centre development.

Second, approximately 18 months ago, we witnessed the emergence of ChatGPT. Substantial data centre infrastructure is required for large AI language models to be trained and distributed to populations. Large facilities filled with NVIDIA chips training these models enable widespread AI access and we are still at the start of this revolution.

Q: Asia-Pacific (APAC) accounts for 70% of cross-border investment in data centres. Why is APAC such a focal point at the moment?

Fred: It is remarkable to see such interest in the APAC data centre market. Historically, capital flows consisted largely of Asian investors seeking exposure to American and European data centre markets, where the sector originated and matured. Now, global investors are targeting Asia because they recognise the promising supply-demand dynamics within the region.

Two-thirds of the world's population resides in APAC, yet the sector remains significantly undersupplied, particularly beyond key financial hubs such as Singapore, Tokyo, Hong Kong, and Sydney. This is driving major regional investment deals, notably Blackstone's acquisition of AirTrunk, predominantly Australian but with data centres across Hong Kong, Japan, and Malaysia. At US$16 billion, it was the largest data centre deal ever completed. A sea change is occurring as investors recognise that Asia's market dynamics are too compelling to ignore.

Q: Which markets in Asia are most exciting for you?

Fred: This year, we're focusing on three core markets in Asia: Japan, Australia, and India.

Japan and Australia have consistently been solid data centre markets from a demand perspective, with their technologically advanced societies. A crucial factor for these two markets involves NVIDIA export controls. Acquiring high-grade NVIDIA chips for AI model training within data centres became significantly more challenging under the Biden administration's procurement regulations and further reinforced in the Trump era.

Only four countries in Asia-Pacific offer unencumbered access to these chips for data centres: Japan, Australia, New Zealand, and Taiwan. Short-term demand for AI data centre development is concentrated in Japan and Australia.

As the world's most populous country with a rapidly developing economy and young population, India also presents tremendous opportunities. Supporting this growth requires extensive data centre capacity development, primarily across Mumbai, Chennai, and Hyderabad. We anticipate that this market will expand rapidly over the next three to five years.

Q: What is happening in Singapore's data centre sector?

Fred: In 2020, the Singapore government implemented a moratorium on data centre development. The reason was straightforward: data centres were consuming too much power on the island. At that point, approximately 7 to 8% of Singapore's power capacity was being devoted to data centres—a substantial amount for facilities most people don't even know exist.

Since then, development has been relatively quiet, with only 80 megawatts of capacity distributed to four data centre operators currently developing these assets.

Singapore's restraint has benefited neighbouring countries, particularly Malaysia. Much of the demand previously targeted for Singapore is now being developed across the border in Johor, where upwards of 2,500 to 3,000 megawatts are being developed.

Demand in Singapore remains high, given its substantial financial enterprise ecosystem. However, the government appears committed to maintaining these restrictions as power management becomes increasingly critical.

Q: What was the effect of DeepSeek's emergence on the sector?

Fred: "DeepSeek had a profound impact on the sector. AI has only truly emerged in the last 18 months, and there was considerable uncertainty about the capacity requirements. Then DeepSeek AI demonstrated that these models could be trained with significantly lower capital expenditure than U.S. cloud providers had anticipated.

Over the last two to three months, we've observed some U.S. cloud providers potentially scaling back their AI infrastructure expectations. Nevertheless, on a global scale, there remains a structural undersupply within the data centre market, particularly in core markets.

While short-term confusion persists regarding how many data centres are needed to operate large AI language models, the overall outlook for the sector remains extremely positive."

Q: Who are the main investors in the space, and why are they targeting data centres?

Fred: The pool of core investors in this asset class is shrinking because the scale of projects has grown so dramatically. Fifty-megawatt data centres are now commonplace, whereas four or five years ago, they typically ranged from 15 to 20 megawatts. The capital expenditure to develop these assets can exceed half a billion dollars.

Consequently, relatively few investors have sufficient capital to deploy into a single asset. Today's core investors are primarily U.S. priority funds and global sovereign wealth funds from Asia and the Middle East.

While many assume investing in the data centre market is straightforward, it remains challenging due to these capital constraints.

Investors are attracted to the sector because it bridges the gap between real estate and infrastructure. On the real estate side, you have physical buildings with long-term leases secured by creditworthy tenants such as Microsoft or Amazon, allowing investors to participate in the digitisation trend.

The infrastructure component involves the significant capital requirements and the 'stickiness' of the income. Unlike traditional office or industrial tenants, data centre occupants are difficult to relocate, securing long-term revenue from some of the world's largest companies.

In the current climate, with real estate markets experiencing shocks such as COVID-19, investors recognise the value of exposure to digital infrastructure through data centres. However, entering the sector isn't simple. Beyond the capital requirements, there is limited expertise available—very few management teams have established track records developing assets for multi-billion-dollar tech companies. This keeps the asset class highly specialised.

Q: What are the main issues investors face when accessing this sector?

Fred: The primary challenge is access to power. A small data centre now consumes four or five times the power of an international airport. Globally, national power grids aren't configured to distribute electricity at this scale.

In some markets, the wait for a power connection following application can extend to five, six, or seven years before a facility becomes operational. Consequently, cities such as Dublin, Singapore, and Amsterdam have implemented de facto moratoriums to restrict development due to concerns about grid capacity.

Securing adequate high-voltage power is the fundamental challenge, prompting investors and developers to explore alternative locations with existing high-voltage substation capacity. Johor has been a significant beneficiary, offering abundant power across the border from Singapore.

Similarly, as Sydney faces constraints in Australia, investors are increasingly targeting Melbourne, which hasn't experienced the same data centre development over the past five to seven years.

Beyond power concerns, navigating complex planning systems presents another obstacle. As facilities grow larger, obtaining planning approvals becomes increasingly difficult due to grid impacts and the transformation of industrial land into what are essentially AI factories.

Local communities may raise objections, but the most successful countries in developing these assets are those that facilitate collaboration between investors, operators, and local communities to advance projects while addressing residents' concerns."

Q: Any predictions for this sector over the next 12 months?

Fred: We anticipate continued positive sentiment within the asset class. Blackstone's record-setting acquisition of AirTrunk last year reinforced the value proposition of the APAC data centre market. We expect more M&A activity at similar scales as investors who entered the sector five to seven years ago look to exit, creating opportunities for new capital.

We also foresee the emergence of new data centre markets within Asia beyond the tier-one locations previously mentioned. Malaysia is growing rapidly, and Thailand is positioned for a strong year. Demand will likely spread throughout the region rather than remaining concentrated in established financial hubs.