APAC needs over USD116b to build out massive data centre pipeline

The pipeline is expected to yield 12.45GW of data centre capacity.

Approximately US $116 billion (AU$183.2B) will be needed to build out the existing colocation data centre pipeline across Asia Pacific in the coming five to seven years as demand for the sector grows, according to calculations by Cushman & Wakefield.

The firm’s H2 2024 Asia Pacific Data Centre Market Update report shows the pipeline of colocation projects (excluding hyperscale projects) in the region either currently under construction or in late-stage planning stands at 12,452 megawatts (MW).

Using the construction cost of a mid-specification data centre for each market as a benchmark, the total capital required to build out the pipeline currently sits at US $116.2 billion (AU$183.6B).

By Cushman & Wakefield estimates, this development pipeline provides an opportunity to generate over $14.9 billion (AU$23.54B) in annual colocation rent and can potentially achieve almost 13% yield-on-cost ratio for developers.

Report author and Head of Research & Insights, Data Centre Group, Asia Pacific Pritesh Swamy said: “Demand for the sector continues to grow – the Asia Pacific development pipeline is already three times greater than existing operational capacity and as demand for cloud, AI, and large learning machine models increase, the CAPEX requirements continue to grow in scale.

“The investment potential of the sector has well and truly captured the attention of investors, as evidenced by the sector’s increasing share of annual real estate investment volumes.”

Five markets account for 80% of pipeline

Of the 12.45 gigawatts (GW) in the pipeline (which excludes land banking activity and projects in early planning stages), over 80% is held in five markets: Japan, India, Australia, the Chinese mainland and Malaysia.

At a city level, Tokyo has the strongest pipeline within Asia Pacific at 1,656 MW, followed by Mumbai (1,143 MW), Johor (1,049 MW), Sydney (783 MW), and Beijing (613 MW). In these key cities, gross yield on cost increases to 14%.

Head of Capital Markets, Asia Pacific, Gordon Marsden said:  “The often-quoted 20-plus percent CAGR on data centre development and the sector’s potential rental streams mean we continue to see a vast array of participants seeking exposure to development. We have seen these investments rapidly evolve from smaller plays on, for example, a piece of land, to larger scale deployments requiring consortiums that bring together a number of different positions. We do expect to see consolidation as the sector matures, but for now at least, the capital requirements mean the sector continues to attract vast capital at a faster rate than other asset classes in the CRE universe.”

Marsden said a slow uptick in transactional activity had helped to provide some clarity around pricing in the past 18 months.

“We have seen a flurry of valuation activity in response to recent transactions in Japan, Korea and Singapore. Mostly, these have been legacy data centres that have leaned into enterprise tenants and colocation operators, rather than hyperscale, but they have nonetheless provided some clarity around pricing.”