Why is there no data center REIT in Malaysia? This question has been asked since three years ago when Big Tech’s multibillion dollar investments started pouring into the digital infrastructure space in Malaysia especially data centers. The answer is quite simply because Malaysia does not have the scale yet for a pure play Real Estate Investment Trust (REIT) unlike Singapore which is a mature hub for data centers. This is despite Malaysia’s southern state, Johor, located next to Singapore, being the fastest growing DC hub in Southeast Asia currently.
“It’s still early days in Malaysia when it comes to data centers,” Dato’ Stewart LaBrooy, Executive Chairman, AREA Group of Companies told W.Media in an exclusive interview. The veteran REIT specialist used to helm AXIS REIT Manager Bhd, one of the most successful REITs in Malaysia.
AREA Group had in October, through its special purpose vehicle Data Gateway Sdn Bhd, purchased 30 acres of industrial land in Delapan, Kedah, to develop the first phase of its hyperscale data centre campus called AREA Data Centre Campus (ADCC).
Today, Malaysia hosts 54 operational DCs with a geographical distribution covering Johor, Klang Valley (including Cyberjaya) and emerging hubs like Sarawak, Kedah and Negeri Sembilan. These are largely co-locations DCs with owner operators.
“All the big players with hyperscale designs have arrived but their data centers are either in the planning stage or under construction. There are a lot of land transactions but only very few big or hyperscale DCs have been completed, for example, Yondr’s facility and YTL’s Green Data Centre Park in Johor. The rest like Google’s first hyperscale DC is still under construction by Sime Darby Property and is only expected to be completed in 2025. The lack of completed hyperscale DCs and the ownership structure of the DCs means you won’t see anyone listing a pure play DC REIT in Malaysia anytime soon,” LaBrooy explained. Some of the hyperscale DCs are expected to only come online at the end of 2025 or in 2026.
LaBrooy reckons that the first pure play DC REIT in Malaysia could likely be listed by Sime Darby Property due to a convergence of favourable factors – hyperscale DC, reliable tenant like Google, 20-year leases, stable long-term recurring income and exponential growth in the sector. This would also require them to build and curate a portfolio of DC assets in the coming years.
LaBrooy admitted that in general, he would not invest in DCs because “It’s enormously expensive, and its technology is a moving target and can become obsolete overnight.” If at all he does invest in data centers, it would only be to lease a powered shell to an operator like Amazon or Google (meaning just the building structure including power, water and fibre connection but without the fit-out of expensive server components).
Currently, the rental income from data centers is substantial – as it can be charged in terms of power used (for example, US$ 200 per kilowatt consumed as a return on the investment of the powered core and shell per month) or can be based on shell – for example, assuming the return is 6% per annum, the rental then would be a 6% yield on the total cost pf the project.
Estimates show that building and land typically comprise only 10% of the cost of a data center, with a majority of the budget going to the expensive rack components.
“I would not buy the DC itself as there are too many risks associated with owning a data center unless you have very good clients like Google,” LaBrooy remarked. He added that the occupancy rate for DCs in Singapore is over 90 per cent so the steady (and substantial) income stream makes it viable to list a pure play REIT DC there.