More DC Reits 'could eventually list in Asia'

More DC Reits 'could eventually list in Asia'

Singapore - THE trend of data centre Reits (real estate investment trusts) hasn't really kicked off in Asia, but it would be "inevitable" in the long term, a senior executive from Digital Realty (DLR), the first data centre Reit to ever list globally, believes.

This is especially after Singapore's Keppel DC Reit has blazed a trail with its successful listing in 2014 and its positive performance thereafter, before the recent stockmarket rout nearly erased all its gains.

If the United States serves as a guidance, many telecommunication companies may in time divest their data centres to third parties such as private investors, operators or Reits, Krupal Raval, senior vice-president (finance), Asia Pacific at DLR, said in a recent interview with The Business Times.

Interest in the asset class is also growing among investors.

DLR, listed on the New York Stock Exchange in 2004, has a market capitalisation of about US$11 billion (S$15.7 billion) - second only to Equinix which is worth about US$18 billion. Equinix is a new kid on the block though, having converted from an operating company to a Reit only last year.

DLR counts major funds such as Vanguard Group, Fidelity and BlackRock as its top investors. The biggest users of its facilities are IBM, JPMorgan and Nippon Telegraph and Telephone (NTT).

Mr Raval said: "If you look at the capital stock of a telecom company, their best and most profitable business is not the data centres. That's the reason why the likes of AT&T, Verizon, CenturyLink are all looking to divest their data centres.

"Within the realm of real estate companies, however, data centres is a very good business, but not in the realm of telecom companies. Their capital is better spent building up their telecom side rather than their data centre side."

The one factor standing in the way of more data centre Reits listing in Asia is market fragmentation. Many different companies in the region own data centres, but few enjoy scale.

Japan is one such market that is "highly fragmented", he said.

"We need to see more consolidation. We need to get to a scale. Right now, there are only a handful of players that would have that existing scale, NTT and KDDI being two of them. It will require a conscientious decision to divest - either spin it out into a Reit structure or sell it to someone else, or consolidation play."

Keppel DC Reit was the first data centre Reit to be listed in Asia. The trust had risen nearly 20 per cent over its listing price to S$1.10 last August, before it became a victim of wider stockmarket volatility.

It also recently reported net property income and distributions per unit (DPU) that surpassed its own forecasts. Mr Raval said its success shows that investors are very comfortable with its model.

There are other Singapore-listed industrial Reits that also own data centre assets. For example, Mapletree Industrial Trust has built two - for Equinix and for Tata Communications. Ascendas Reit also has three data centres here.

Operators such as Equinix, Global Switch, NTT and iO, as well as end-users such as Singtel, MediaCorp, Pacnet, CenturyLink and banks also have data centre assets here.

Local bank OCBC said it will relocate its data centre in Singapore to a new facility with thrice the data capacity from early 2017. UOB also owns data centres, while DBS prefers to lease space from third-party providers.

As for Singtel, it owns eight data centres in Singapore, with two more in Australia and two in Hong Kong. When asked if it might divest its data centres in future, Goh Boon Huat, vice-president, business products, group enterprise, said the group has "no plans" to do so.

"On the contrary, we are investing in a new S$400 million data centre at Jurong," he said.

Still, Mr Raval is looking at the long term. He believes that the portfolios of data centre Reits don't have to be limited to the geography they are listed in. Even for Keppel DC Reit, not all its assets are in Singapore. It also owns facilities in Australia, and as distant as Germany, Ireland, the Netherlands and the United Kingdom.

This poses an opportunity for Singapore, he said. "So if India and China are not able to come up with elegant Reit models, there is an opportunity for those listings to reside here."

In China, about three quarters of its data centres are built by China Mobile, China Unicom and China Telecom, all state-owned or state-linked.

Besides commonly cited factors such as the proliferation of cloud computing, e-commerce, big data, as well as increased compliance and regulatory requirements for the finance industry, Mr Raval said the biggest draw for investing in data centres is the resilient supply-demand dynamics.

Compared with other traditional real estate segments which are mostly facing oversupply and slowing demand in Singapore, Mr Raval noted that in contrast, demand for data centre facilities has been robust and is likely to be sustained in the medium term.

According to Cushman & Wakefield, the annual absorption by square footage has grown at 30 per cent CAGR (compound annual growth rate) from 2008 to 2015 and is set to continue at double-digit growth rates. This is despite a 47 per cent ramp-up (by megawatt) in supply of data centres expected in Singapore by end-2016.

Mr Raval believes that data centre Reits will deliver better distributions than other Reits in traditional asset classes. "The demand growth profile of the business is so healthy that even if you do have new supply, the demand side is better, so your DPU yield is going to be better. Even in a rising rate environment, your revenue will still grow faster than your borrowing costs will grow," he said.

In a country such as Singapore, the authorities are also "brilliant" in the way they control the supply of data centres. JTC Corporation, for instance, is very prudent about allocating land to data centre providers, so it is unlikely that there would be a glut of data centres coming onto the market, he said.

Compared to Asia, the data centre Reit sector in the US is already developed, with about six players, namely DLR, Equinix, DuPont Fabros, CyrusOne, QTS Realty and Coresite Realty, with a combined market cap of close to US$40 billion.

This article was first published on January 25, 2016.
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