“Just think about all of the data that’s created and where that will all be processed.”
Each generation of mobile phone technology exponentially increased the amount of data being created, replicated and stored – and 5G will do the same.
“All that data being generated has got to be moved, it’s got to be securely stored, it’s got to be processed,” Maydew says.
“And all that, in the main is going to happen in a data centre.”
Simply put, a data centre is a building that houses computer equipment to store, process and distribute data. They are where the ‘cloud’ in cloud computing is physically located.
To help familiarise traditional real estate investors, Maydew likens data centres to shopping malls.
“Most of us have a pretty strong mental picture of a shopping mall,” he says.
A mall is essentially a building bringing people together with goods and services in one location with specialty shops catering to different interests, but curated by the landlord to maximise its value. Some tenants want close proximity to other tenants and are willing to pay a premium for that privilege. Being located close to a wealthy, growing population is an important distinction for high quality A-grade malls.
Perhaps surprisingly, many of the same principles apply to data centres. Except instead of people coming and going, it is information.
Co-location data centres for example also have multiple tenants, just like a mall. The tenant roster is self-fulfilling and can also attract other high-quality tenants wanting to be in the same data centre. As the landlord curates the tenant roster, they are also able to charge a fee for tenants to share data between each other, bolstering the revenue stream of the asset further.
This physical proximity is as important for data as it is for malls – being close minimises latency, speeding up information exchange and improving the efficiency of doing business and distributing information to the consumer.
Similarly, internet gateway critical data centres are best positioned close to their end users, meaning they often end up in or close to densely populated centres just like a high-quality mall.
One of the key attractions of the Chinese data centre market is its projected growth and lack of supply in the key gateway cities.
In a 5G world, in theory you’re not going to have to leave your living room and attend someone’s office to discuss a project. You could, say, engage with an interior designer to assess plans for your apartment and see things virtually in real time. It’s a Jetsons world we’re moving into.”
– James Maydew, AMP Capital
Over the next three years, Chinese cloud computing revenues are forecasted to triple from US$9 billion in 2019 to US$29 billion in 20222.
The continuation in the cloud boom will drive strong demand for hyperscale data centre space.
Also attractive is the fact the Chinese data centre market is still relatively nascent in its life cycle relative to other markets.
The US, the world leader in cloud computing, recorded US$60 billion in cloud computing revenue in 2019 and is forecasted to surge to US$149 billion by 20223.
Compared to the US, the Chinese market remains fragmented and dominated by the big telecommunications carriers. The three big Chinese telecommunications companies account for 45 per cent of the data centre market4.
This is a similar picture to the early days of the industry around the globe. However, like in the move elsewhere, the market is expected to shift away from incumbent telecom giants to independent, carrier-neutral operators over the next few years.
There are two main factors driving this change.
Specialist carrier neutral operators tend to simply be better at running data centres and the high customer service expectation as that is their core business, rather than an add-on to a wider communications operation.
But perhaps more importantly, the data centre business is quite capital intensive. International experience shows the Chinese telecoms companies themselves are likely to plan a retreat from the sector to free up capital to invest in their core operations, allowing specialists to manage the data warehousing more efficiently.
These trends mean carrier-neutral data centre revenues in China are forecasted to increase by 25 per cent to 30 per cent over 2020-2022, lifting their market share growth over the telecoms companies who are expected to see flat to declining growth rates5.
So, where in China are best prospects for data centres?
Maydew and his team focus on the big cities of Beijing, Shanghai and the Greater Bay Area. This is where the largest populations live which have the highest demand for digital services and importantly where there is literally zero planned new supply of competition data centres, given the strict planning and density restrictions, leading to outsized pricing tension for the landlord to grow its rent roll.
This is unlike the rest of China, where supply of new data centre space is doubling over the next few years.
“More importantly, the key three cities are where you have minimal supply which means you’re going to have pricing tension.”
“Even though everything’s moving virtually and everything’s moving quickly, you still want to have proximity, to be as close to the customer as possible,” says Maydew.
“If you are a streaming provider or a social media company (or any other industry that requires time critical data) you cannot have buffering or latency – it influences the consumer experience and therefore the legitimacy of your business model.”
“For many data dependent business models, you need to be embedded in the urban core ideally at the gateway of the internet to be able to be competitive in your chosen digital business channel.”
1. Goldman Sachs, July 2020
2. Goldman Sachs China Data Centre Report July 2020 & UBS Report July 2020
3. UBS Initiation of Coverage: China data centre sector – 14 July 2020, pg1
4. UBS Initiation of Coverage: China data centre sector – 14 July 2020, pg4
5. UBS Initiation of Coverage: China data centre sector – 14 July 2020, pg1