As a hub, Singapore is an attractive location for data centres, data centre funds and investors of data centre stocks, which are listed on both the Singapore Exchange S68 (SGX) and Nasdaq.
The externally managed S-REIT structure in Singapore’s ecosystem makes REITs a passive investment vehicle. This setup allows pass-through cash flows to be distributed to unitholders as distributable income and distributions per unit. In this structure, Keppel is the sponsor of Keppel DC REIT (KDC REIT), while its unit, Keppel Data Centre, operates and manages KDC REIT’s data centres.
Keppel Data Centre specialises in operating and constructing co-location data centres. These facilities rent out rack space to various third parties, allowing multiple companies to co-locate their servers and equipment in one centre. Once these data centres achieve high occupancy and stability, they are offered to KDC REIT, providing funds for Keppel to develop new data centres and sustain the cycle.
The Edge Singapore’s analyst, Thiveyen Kathirrasan, has compiled a list of data centre players. Keppel and KDC REIT are at the top of the list with the best scores, indicating that these companies are attractive as investments. Based on Tables 1 and 2, these two stocks are among the best proxies to take advantage of data centre growth. Keppel DC REIT is also viewed as an indirect way to invest in AI.
Based on its 1QFY2024 ended March updates, KDC REIT owns 23 data centres valued at $3.2 billion. Of its data centres, 71.8% are in Asia Pacific, mainly in Singapore, Australia, and China, with the rest located in Europe.
Keppel DC REIT was listed in December 2014. Since the IPO, the way Keppel structures its business has changed. It has shed its conglomerate structure, divested legacy assets such as its offshore rigs, and focused on being an asset manager of “alternatives” with around $79 billion of funds under management as at the end of April and a target of $100 billion by 2026. An important cog in Keppel’s wheel is the building and operation of data centres as global digitalisation continues to grow.
Some dark clouds
See also: Keppel’s private fund enters JV to develop 80MW data centre campus project in Taiwan
After uninterrupted DPU growth from 2016 to 2022 (see Table 3), KDC REIT is facing challenges, particularly with its investment in Guangdong Data Centres 1, 2, and 3. Tenant issues with Bluesea Development, the master lessee of these centres, have led to irregular rent payments.
In a June 11 report, UOB KayHian said: “To date, KDC REIT has recognised loss allowance of $5.3 million for uncollected income from the Guangdong data centres (rental income from DC1 and DC2 and coupon income from DC3), which has a negative impact of 0.326 cents or 13% to 1QFY2024 DPU. We expect the loss allowance to be recognised till 1HFY2025.”
“The decision by tech giants like the Magnificent Seven to build their own data centres marks a significant shift in the real estate landscape traditionally dominated by landlords such as REITs, who leased out data centre space. This shift may lead to reduced occupancy rates for REITs, prompting them to innovate by offering competitive pricing and specialised services. These services include high-level technical support, proactive maintenance, and customised solutions tailored to meet the evolving needs of data-intensive tenants,” notes Kim Yoon Young, cluster president of Singapore and Brunei, Schneider Electric.
Despite these challenges, both Keppel and KDC REIT maintain high occupancy rates. Keppel’s new co-location data centre, Keppel DC SGP 7, is fully pre-committed, and KDC REIT reports a 98.3% occupancy rate as of 1QFY2024.
Looking ahead, Keppel signed an MOU with Mitsui Fudosan to jointly explore data centre development in Japan and Southeast Asia. Keppel Data Centre Fund II (KDCF II), which closed in 2022 with $1.1 billion in commitments, has a framework agreement with Mitsui Fudosan for the forward purchase of a data centre currently being developed in Western Tokyo.
Significant expansions in co-location capacity are planned in Singapore, including Keppel DC Singapore 7, AirTrunk’s SGP1, Equinix’s SG4, and Singtel’s DC Tuas. Major cloud service providers like AWS and Google are also expanding their facilities in Singapore.
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Optimus locus
Digital Realty is a global developer, operator, and owner of data centres, and it is listed as a REIT in the US.
In 2021, Digital Realty listed Digital Core REIT with mainly stabilised US data centres. DC REIT has access to Digital Realty’s data centres globally should it wish to purchase them, subject to financing and pricing availability. Since its IPO, DC REIT has acquired stakes in Digital Realty’s Frankfurt and Osaka data centres.
In Singapore, Digital Realty owns and operates three data centres. Two are in Loyang, where one opened in 2022, and the third is in Jurong East. Equinix, a data centre operator listed on Nasdaq, owns and operates five data centres in Singapore.
Singapore’s appeal as a data centre location is manifold. It offers a cost-effective market, minimal natural disaster risks, reliable and affordable power supply, and is renowned as one of the best global business environments.
With strong demand from fintech, e-commerce, cloud services, and international enterprises, Singapore has established itself as a premier data centre hub, attracting major players like Google, Microsoft, AWS, and Chinese hyperscalers such as Alibaba and Tencent.
According to DC Byte, the colocation segment dominated Singapore’s data centre market in 2023, capturing 57.1% of capacity. “Local operators such as Keppel Data Centres, Singtel and ST Telemedia, as well as international operators such as AirTrunk, Digital Realty and Equinix, have significant market presence,” DC Byte says.
A data centre supply moratorium was implemented in 2019 and lifted in 2022. “The multi-year pause on new data centre development has led to high demand in Singapore, resulting in high utilisation rates of 99% recorded in 2023,” DC Byte says.
Other data centre players
In our scoring table, a third stock, Prologis, has high scores, which means it is a great stock to own. As the name suggests, Prologis is actually an owner and operator of warehouses and logistics assets. However, it pivoted to data centres in partnership with Skybox Datacenters, first in Chicago in 2021 and then in Texas in 2023. In May last year, the duo announced the development of a 600MW, 1 million sq ft campus in Austin. In Chicago, Prologis and Skybox opened a data centre this year near O’Hare Airport.
In its 1QFY2024 ended March 31 update, Prologis said it planned to spend US$2.75 billion ($3.71 billion) over five years to convert 11 warehouse assets into 700MW data centres. Additionally, Prologis will invest US$4.75 billion in a build-to-suit programme to develop nine data centre campuses with a capacity of 2,400MW.
With the increase in global data centres, the focus is increasingly on renewable energy sources. Data centres are huge users of energy. According to some accounts, data centres consume around 3% of global energy generated, which the International Energy Agency (IEA) expects to double by 2026.
Despite energy concerns, “the exponential growth in cloud services and advances in AI are primary catalysts, generating substantial demand for data centre infrastructure,” Kim of Schneider Electric says. “Investor confidence is also reflected in the positive stock performance of key players in the data centre infrastructure sector,” he adds.
