With the AI boom and the rapid advancement of technology, one of the hottest investment opportunities in Malaysia is undoubtedly in the data center sector. Global technology giants such as Nvidia, ByteDance, Microsoft, Google, and Singtel are expanding their data center footprints into Malaysia. Naturally, investors, companies, developers, landowners, contractors, and infrastructure owners are all looking for ways to benefit from this data center boom.
In this article, we aim to explore the investment opportunities in data centers from a corporate investment perspective. If you are considering an investment or a stake in data centers, this will serve as a foundational guide to understanding the various business models and opportunities in this sector.
The Complexity of Data Center Development
Developing a data center is significantly more complex than traditional real estate projects such as corporate towers, shopping malls, or hotels. It is rare for a single entity to handle the entire process of developing, funding, constructing, leasing, finding tenants, and managing a data center due to the following 5 critical factors:
- 1. Funding: The construction of a data center is capital-intensive, with investments ranging from hundreds of millions to even billions of dollars, depending on the scale and specifications. The cost of developing data center capacity is often measured in price per MW of critical power. For Tier III facilities, this can range from $7-10 million per MW, depending on location and specifications. For instance, the development of a 50MW hyperscale data center in Malaysia can require investments upwards of $450 million. Securing financing involves engaging with core funders who can provide substantial capital or financial guarantees. Potential funding sources include large banks, private equity firms, and institutional investors. Corporate guarantees from financially robust companies are often necessary to secure loans with favorable terms.
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- 2. Land: Identifying and acquiring suitable land for a data center in Malaysia poses numerous challenges. Beyond just land, there are specific infrastructure requirements such as tunnels for cabling, substations for power distribution, redundant power supplies, and robust water cooling systems. The selection criteria for land include proximity to fiber optic networks, availability of renewable energy sources, and minimal risk of natural disasters. Collaboration with experienced property developers familiar with local zoning laws and government approval processes is crucial to navigate these complexities efficiently.
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- 3. EPC Contracts: The complexity of modern data centers, particularly hyperscale, Tier-4, or AI data centers, necessitates sophisticated Engineering, Procurement, and Construction (EPC) contracts. Hyperscale data centers, for example, require high-density power configurations, advanced cooling systems, and extensive cybersecurity measures. An effective EPC contract must outline the specific technical requirements, performance standards, and compliance with international standards such as the Uptime Institute’s Tier Standards and ASHRAE guidelines. Choosing experienced EPC contractors with a track record in large-scale data center projects is essential to ensure successful project delivery.
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- 4. Management: Effective data center management requires specialized expertise in areas such as IT operations, facilities management, and cybersecurity. Data centers demand near 100% uptime, as any failure or downtime can lead to substantial financial losses and significant compensation liabilities. Therefore, it is crucial to implement protocols such as advanced monitoring systems, predictive maintenance, and robust disaster recovery plans as essential components of effective data center management.
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- 5. Tenants and Clients: Understanding the purpose of the data center—whether for self-consumption or leasing—is critical. As demand for data centers grows, so does the supply. Geopolitical concerns, such as US-China tensions, also influence client decisions, particularly regarding the sources of chips and racks within the data center. To ensure a successful investment return on data centers, typical high utilization rates of 80% are crucial for maximizing returns. In order to attract quality anchor tenants, data centers need to offer value-added services such as cloud computing, colocation, and managed services to attract a diverse, high-quality tenant base and enhance revenue streams.
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Corporate Investment Opportunities
Given these complexities, corporate investment opportunities in data center development generally fall into three categories:
- 1. Joint Ventures (JVs): This model involves collaboration among developers, funders, EPC contractors, and data center managers to collectively construct, build, and manage data centers. JVs leverage the strengths of each party to navigate the intricacies of data center projects. For instance, a property developer might provide land and local expertise, while a technology company contributes its knowledge in IT infrastructure and management. The shared risk and pooled resources make JVs a viable option for large-scale data center projects.
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- 2. Acquisitions: Companies that prefer to avoid the lengthy process of constructing a data center from scratch can opt to acquire existing data centers. This approach allows them to immediately integrate the asset into their portfolio and manage it directly. Acquisitions can be particularly attractive for companies looking to expand their data center footprint quickly to meet growing demand. Due diligence in assessing the existing facility’s condition, tenant agreements, and operational performance is crucial to ensure a sound investment.
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- 3. Funding by Sovereign Wealth Funds, Listed Company or Private Equity Firms: Data centers are highly attractive to sovereign wealth funds, listed company, and private equity firms due to their potential for high returns. In Malaysia, mature data centers can potentially yield standard EBITDA margin between the typical ranges of 40% to 60%, and the capitalization rates and triple-net ROI for data centers could even exceed 7%, influenced by location, tenant quality, lease terms, facility specifications, and overall market conditions, making them a lucrative investment for funds looking to invest and possibly exit through REIT listings. Those sovereign wealth funds, listed company or private equity firms can provide the necessary capital for development and leverage their networks to secure high-value tenants. Additionally, REITs offer liquidity and diversification benefits for investors seeking exposure to the data center sector.
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Strategic Considerations for Corporate Investment
Depending on their investment thesis, companies may explore various strategic opportunities:
- 1. Land Disposal: Landowners or developers with significant land banks may view the data center boom as an opportunity to sell land at a premium. This strategy offers a substantial one-time gain but limits long-term profit potential. For example, prime locations near urban centers with excellent connectivity infrastructure can command significantly higher prices, attracting both local and international investors.
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- 2. JV with Intent to Sell: Some entities might form a JV to develop and construct a data center with the intention of selling it to another company that specializes in data center management. This strategy can be more lucrative than merely selling the land, as the completed data center represents a higher-value asset. By leveraging the combined expertise of JV partners, the project can achieve higher efficiency and quality, making it more attractive to potential buyers.
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- 3. Long-term JV Management: Developers or landowners might form a JV to co-own and manage the data center, generating long-term income for all stakeholders involved. This approach leverages the ongoing demand for data center services and provides a steady revenue stream. Long-term management requires implementing advanced data center infrastructure management (DCIM) tools, optimizing energy efficiency, and maintaining high levels of customer satisfaction through robust service level agreements (SLAs).
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- 4. Full Ownership: Ambitious players may choose to fully own and operate the data center. This path is the most challenging as it requires dedicated focus on development, management, maintenance, and client acquisition. However, it also offers the highest potential profits, as there are no management fees to external parties. Full ownership entails significant responsibilities, including continuous innovation in data center technologies, maintaining competitive pricing, and ensuring compliance with evolving regulatory standards.
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Conclusion
The data center economy in Malaysia is rapidly growing, presenting numerous considerations for potential investors. From a corporate investment perspective, there is no one-size-fits-all solution. The best approach depends on an entity’s capacity and strategic objectives, whether they are seeking short-term gains or aiming for long-term management and income generation. By understanding the various business models and investment opportunities, companies can make informed decisions to capitalize on this booming sector.
If you are considering exploring opportunities in Malaysia’s thriving data center sector or corporate investments, reach out to our team of experts today. Our experienced lawyers specialize in navigating the complexities of data center development and corporate investments in Malaysia. Whether you’re looking for legal guidance on land acquisitions, joint ventures, or navigating regulatory landscapes, we’re here to provide tailored advice and support. Contact us to learn more about how we can assist you in maximizing your investments in this dynamic industry.
About the authors
Ong Johnson
Partner
Head of Technology Practice Group
Transactions and Dispute Resolution, Technology,
Media & Telecommunications, Intellectual Property,
Fintech, Privacy and Cybersecurity
johnson.ong@hhq.com.my
.
Lo Khai Yi
Partner
Co-Head of Technology Practice Group
Technology, Media & Telecommunications, Intellectual
Property, Corporate/M&A, Projects and Infrastructure,
Privacy and Cybersecurity
ky.lo@hhq.com.my.
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