Johor's data centre boom – or bust?

The four parks, separated mainly by palm oil plantations sprawled all over Johor’s forest reserves, average a few hundred acres in size. Nusajaya Tech Park, for instance, is spread over 519 acres of land, while Sedenak Tech Park (STeP), known previously as Kulai Iskandar Data Exchange (Kidex), occupies 745 acres. For reference, one football field is roughly 1.32 acres worth of land.

“Designated to attract the development of data centres, the area is safely secured and equipped with abundant energy and water resources, all critical for the operation of international standard data centres. STeP has the full support of the Malaysia Digital Economy Corporation (MDEC), the Malaysian lead agency for ICT and Digital Economy growth, and its proximity and dark fibre connection to Singapore positions it as the major alternative data hub for the Southeast Asia region,” reads STeP’s website. 

Johor has capitalised on Singapore’s limited physical space and data centre boom in recent years. In 2019, the Singapore government imposed a moratorium on data centre construction, capping the country’s capacity at 1.4 gigawatts (GW). With land and power constraints, hyperscalers and operators turned to alternatives across the border from the densely populated city-state.

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A screenshot of Sedenak Tech Park in 2021. Photo: Sedenak Tech Park 

Both Johor and Indonesia’s Batam have emerged as contenders, favoured for their proximity to Singapore. But the Malaysian state has undeniably won the attention of builders. 

For instance, Asher Ling, CTO and managing director of Singapore-headquartered Princeton Digital Group (PDG), says he bought land in both states nearly two years ago. But while he is still sitting on a few unconstructed acres in Batam, the investment in Johor most recently took off, as the group held its opening ceremony for its first 60 megawatt (MW) build of the announced 150MW facility on July 3. 

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Ling acknowledges that the Malaysian government’s favourable data centre policies have played a significant role. For data centre players, incentives include 100% tax exemptions on investments in data centres and cloud businesses. Additionally, the Malaysian government’s media arm plans to increase the number of Internet Exchange Point (IXP) providers from 12 to 66 by 2025.

A report by American global commercial real estate services firm Cushman & Wakefield (C&W) finds that as at 2H2023, Johor has 200MW of live data centre facilities, which refers to a facility that is fitted out with all necessary equipment and is ready to service clients. The region has a 4% vacancy rate, higher than the bursting 1% vacancy rate of Singapore, but well below the alleged 10% global data centre average, says Wong Xian Yang, head of research, Singapore and Southeast Asia, at C&W. Notably, Johor’s vacancy figures fluctuate across reports, as more data centres have started to come online in the last few months. 

Wong: Reputation and track record are factors that will differentiate various data centre players in the market. Photo: Cushman & Wakefield 

“[These 200MW of live facilities are] built to suit, taken up mostly by ByteDance and Sea Group,” says Wong, who adds that these tenants reside in Bridge data centre and YTL Corp’s green data centre park respectively. “Built to suit” means that the facility is built to a tenant’s exact specification. 

C&W’s report did not account for recent announcements and plans made in the past few months. Riding on robust ambitions spurred by the spillover demand from Singapore, referred to as the Singapore Plus (SG+) strategy, numerous data centre operators and hyperscalers have announced plans for hundreds of megawatts worth of facilities.

Malaysian utilities and construction conglomerate YTL Corp, whose green data centre campus currently mainly serves Sea Group, says its data centre build is scalable to 500MW, following a deal it struck with Nvidia in late 2023 to build “AI data centres”. Amsterdam-based data centre operator Yondr Group announced a 200MW build with a US$150 million ($202.6 million) loan from the International Finance Corp at the STeP. 

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Equinix, one of the largest global data centre data centre providers, announced a US$40 million investment with 500 cabinets, 1,960 sq m of space, and an undisclosed capacity of MW. One of its peers, Chinese provider Bridge data centre, said it would build a 110MW project over its 38-acre site, also at the STeP, while Singapore-headquartered PDG announced a 150MW campus within the same area. 

Even telecommunications groups are eager for a slice of the pie. Singapore Telecommunications Z74 (Singtel) and its regional data centre business, Nxera, have partnered Malaysian telco operator TM to build a data centre in Iskandar Puteri. The initial phase of 64MW has been announced, with the potential to scale up to 200MW based on market demand. This marks the largest data centre facility for both operators to date.

Oracle and Microsoft are also rumoured to have been looking for and negotiating deals, though the extent of the talks are unknown, says C&W’s Wong. “What has been planned is over 1,000MW or 1GW worth of capacity, which means that the supply can increase quite rapidly over the next few years,” he adds. 

Risk of oversupply 

On July 4, just a day after the opening ceremony of phase one of its JH1 campus, attended by the Malaysian authorities, clients, and investors, PDG’s Ling hosted a media briefing at the facility. Clearly optimistic about his Johor data centre business, Ling started the tour with introductory slides.

PDG has a presence in six countries and 15 cities, with 21 data centres totalling about 800MW of capacity. “We have data centres in Singapore, Indonesia, India, China, Japan and, last but definitely not least, Malaysia. In fact, I would emphasise our investment and our scale in Malaysia as it is the largest of all the regions [even though] it was the most recent foray for us… it is now the largest and fastest in terms of build,” says Ling. 

He explains that PDG’s rapid construction of the data centre in Johor was driven not only by the Singapore moratorium but also by the sudden surge in AI trends. The demand for large-scale data centres to support computing power and AI deployments has grown exponentially since ChatGPT was launched in November 2022.

In the span of less than 12 months, the barren piece of land that Ling had purchased at the STeP was transformed into a mega facility. “In fact, my first pile on the ground was on July 15 last year. By Christmas, I had the building topped out; then by March, I had power [supplied],” he says.

Powered by two 132-kilovolt substations and over 100 to 110 racks per data hall that can host from 30 kilowatt (kW) to 40kW worth of IT load each, PDG’s AI-ready data centre was unveiled this month. According to Ling, the data centre is ready for services and for tenants to occupy the space. However, he declined to disclose whether there are committed clients for the first 60MW of build.

Wong from C&W notes that some of the data centres under construction are built speculatively, meaning they lack a pre-commitment from an anchor tenant. “So [the developers] build it, and while building they work to find customers for their data centres,” he adds. 

The 1GW or more of planned data centre build over the next two years is a big figure over a short time span, considering Singapore built its 1.4GW of total capacity over a period of more than one decade. “They can plan to build 200MW of facilities, but whether they actually build 200MW I think is another question,” adds Wong. 

He: Should a situation of oversupply happen, it will likely only take place in the next 12 to 24 months when the bulk of planned supply comes on stream. Photo: Colliers 

With that, the question of whether Johor is building too many data centres has become pertinent. Catherine He, head of research, Singapore, at real estate consultancy Colliers, says: “It appears there might be an oversupply.”

She cites a high-level analyst report from DC Byte, a global data centre market intelligence firm covering regions including the Americas, Europe, the Middle East, Africa, and Asia Pacific. As of the end of 2023, out of the nearly 3.3GW of announced data centre builds in Malaysia — encompassing live, under construction, committed and early-stage IT build — less than 10% were operational and less than 25% were pre-committed, says He.

“This implies that these operators are building speculatively without client commitments, and is likely the result of the ease of procuring land in Johor. Furthermore, Malaysia’s utility provider Tenaga Nasional is committed to ensuring that power and power transmission will not be an issue,” she adds. 

IT capacities in the Southeast Asia-5 markets. Credit: DC Byte 

However, He notes that the report by DC Byte was conducted more than six months ago, and says “this pre-commitment number is likely to have improved”. Should a situation of oversupply happen, it will likely only take place in the next 12 to 24 months when the bulk of the planned supply comes on stream, she adds.

But He remains one of the few more cautious market watchers. UK real estate firm JLL’s director of data centre research Asia Pacific, Syafiq Muhd, believes that “it is quite unlikely that we will see oversupply in Johor”. His teammate, Kent Seet from Malaysia, says JLL has observed that most of the data centre capacities have been allocated to their respective clients. 

“Our experience suggests that while some data centre operators acquire land on a speculative basis, the majority of operators would have already secured clients to pre-lease their facilities before construction,” Seet adds. 

However, he also cautions that it is reasonable to question whether the current cloud boom and AI hype indicate over-excitement in the industry, which could lead to an oversupply scenario in the long term.

If oversupply occurs, the data centre sector may plateau, requiring time for excess capacity to be absorbed. Currently, technological advancements are pivotal in shaping future demand for data centres. Seet adds that the sector’s future success hinges on ongoing technological improvements and businesses’ continued reliance on the facilities.

Likewise, managing director of CapitaLand Investment (CLI) Michelle Lee is of the view that the longevity of the data centre industry in Johor is dependent on the pace of technological advancements. “If AI continues to drive explosive growth in data centre demand, there is indeed potential for strong take-up in Johor,” she adds. 

Market inventory, occupancy and pricing growth in Asia Pacific. Credit: CBRE, Cushman & Wakefield, DC BYTE, CLI Pera Research (JUNE 2024) 

Data centre as an asset class 

In the first quarter of 2024, acquisitions of Asia Pacific data centre assets totalled more than US$1.6 billion, surpassing investment volumes recorded in both the first and second halves of 2023, according to MSCI’s Asia Pacific Capital Trends report.

This shift in institutional investor interest towards data centres is especially evident in Asia Pacific markets, according to the APAC Data Centre Investment Strategies in the Age of Digitalisation report released in July by CLI. 

The report found that from 2019 to 2023, transactions involving Asia Pacific data centres rose to approximately US$22 billion — or almost 2.4 times the level recorded over the preceding five years — even as markets in general stagnated during the Covid-19 pandemic.

However, the notable scarcity of stabilised data centres available for sale in the region indicates that the most promising opportunities for investors lie in developing new data centres. According to CLI’s report, a stabilised data centre has tenants occupying and paying rent for most of its capacity, making it a strategy to meet new demand while potentially offering higher returns.

Ling: Our investment and scale in Malaysia is the largest of all the regions [even though] it was the most recent foray for us. Photo: Princeton Digital Group 

Notably, PDG’s fast takeoff from when Ling first purchased land in Johor not more than 18 months ago can be attributed to its strong financial backing from its investors — Warburg Pincus, Ontario Teachers Pension Plan and Abu Dhabi sovereign wealth fund Mubadala. “We are a very well-capitalised company, and in the financial circles we like to say that we are very strong on the dry powder side,” says Ling. 

In mid June, a KKR-led consortium invested $1.75 billion in ST Telemedia Global Data Centres alongside Singtel, in what marks the largest digital infrastructure investment in Southeast Asia to date in 2024. Last September, KKR bought a 20% stake in Singtel’s regional data centre business, Nxera, for $1.1 billion.

Previously, Bain Capital announced a deal in August to take Beijing-based data centre business Chindata Group Holdings private with an implied equity value of US$3.2 billion, while Blackstone announced the launch of its first wholly-owned data centre platform in Asia in November 2022. 

Including the Singtel platform, KKR sees the potential to invest US$1 billion in equity on data centre projects in the Asia Pacific region in coming years, said Projesh Banerjea, the firm’s director of infrastructure, in an interview with Bloomberg. “Returns for such investments are in line with targets for KKR’s infrastructure strategy, which are in the mid-to-high teens,” he said.

“This is a super-easy investment story,” notes Morgan Laughlin, global head of data centre investments at PGIM. “You have demand, which is growing with no end in sight, and you’ve got supply becoming increasingly constrained with no solution in sight.”

Lessons from the past 

Such optimism about Johor’s growing data centre economy recalls the early 2000s when investors were enthusiastic about the Iskandar Economic Zone. Originally planned as an economic growth corridor in 2006, the example of Forest City, once hailed as a vibrant residential town but now dubbed a “ghost town” by the BBC, reflects the mixed success of the project.

Ling says data centre operators like PDG view Johor as a crucial component of their symbiotic relationship within the broader group. “Singapore, as the data centre hub of Southeast Asia, has built itself up over the last 15 years, and a lot of the application and compute loads in the broader region is served out of Singapore. It is my personal opinion that Singapore will continue to retain its competitive edge from that perspective.” 

But for Ling, this signals that specific customer applications or needs might not need to be housed in Singapore, potentially offering cost benefits for operators.

Regional development cost scenarios of data centre build. Multi-level data centre development (approximately 5 acres + 50MV operational load) Credit: Cushman & Wakefield 

According to C&W’s Asia Pacific data centre construction cost guide for 2023 and 2024, Singapore is the most expensive market to construct a data centre out of 40 cities in Southeast Asia. It has an average cost of US$11,573 per sq m of cost of construction, while Johor averages at US$624 per sq m. For every one MW of build, Singapore’s cost came in at US$11.23 million on average, while Malaysia’s stood at US$8.53 million. 

“If you’re looking for mission-critical workloads where you need fast and low latency, where you cannot withstand a few seconds of delay, it will likely be housed in Singapore,” explains C&W’s Wong. This means that critical information such as financial services will continue to be housed in Singapore. 

Meanwhile, workloads that are not as critical, and are able to handle a few seconds of delay, may be housed in Malaysia. AI for machine learning, which will physically require a lot of data centre space, may not be housed in Singapore, and AI inference for self-driving cars might be housed in Johor, says Wong. 

PDG’s Ling says the group’s first phase of the 60MW build is “AI-ready” in two aspects. Beyond its scale, the data centre is also built to cope with higher density and has the flexibility to accommodate future cooling technologies needed for AI servers and racks. 

PDG’s current rack density is 30kW to 40kW, which is already pushing the physical limitation of air-cool technology. For reference, legacy-owned data centres had rack densities ranging from 1kW to 5kW, which grew to 5kW to 10kW with the emergence of public cloud and hyperscaler deployments over the last five years. Now, with the recent requirements of AI and machine learning, rack densities have more than tripled to range from 30kW to 50kW.

Likewise, Singtel has touted its joint venture with TM in Johor as an AI-ready data centre, in which customers can tap into its cloud orchestration platform and upcoming GPU-as-a-Service to orchestrate their AI workloads in a multi-network and multi-cloud environment. 

“This data centre campus we are developing in Johor will have large computing capabilities and feature advanced technologies like liquid cooling to support heavy AI workloads and operations. Existing data centres may not be built or cannot be easily modified to handle such new workloads,” says Bill Chang, CEO of Nxera and Singtel’s Digital InfraCo unit. 

On the back of such big investment announcements into the Johor data centre space, Singapore has rebounded from its 2019 moratorium, accelerating plans for new data centre builds amid the global AI surge. The country’s digital economy relies heavily on these facilities, with the ICT sector contributing 17% to its GDP as of 2022.

The country cannot lose out, and as a result, it announced at the end of May that it will allocate 300MW of additional capacity in the near term, and potentially 200MW or more through green energy deployments. 

With a mid-to-high teens CAGR growth in cloud computing and a “very, very large demand” to deploy AI data centres, what remains is how well co-location operators can service their clients, and how well hyperscalers can build. 

“If an operator has a very good track record, they have data centres globally, they’d more likely be chosen to house all this [workloads for customers]. So reputation and track record are factors that will differentiate various players in the market,” says Wong. 

After a day of eating and shopping in Johor, Singaporeans returning home will often pass by developments like Forest City and R&F Princess Cove standing half empty — a reminder of past excesses. Can Ling and the other data centre players rushing into Johor avoid a similar fate for their facilities? Only time will tell. 

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