In the previous episode, we covered many aspects regarding real estate market research. Today, Anthony will share his insights regarding a different segment: the Hong Kong industrial market and the emerging interest in data centres.
- Data Centre: Rising Demand
- Converting Buildings Into Data Centre
- Hong Kong Data Centre – the comparative advantage
▶ Connect with Anthony:
- LinkedIn: https://www.linkedin.com/in/anthony-wong-8ba67080/
▶ Source & Supporting:
RVD statistics – https://www.rvd.gov.hk/en/property_market_statistics/index.html
Buildings Digest – https://www.bd.gov.hk/en/whats-new/monthly-digests/index.html
Land Sale – https://www.landsd.gov.hk/en/landsale/index.htm
Data Centre: A data centre is an enclosed space where everything related to data is stored and handled inside a mass number of computers, devices through many servers and networks.
5G: 5G is the abbreviation for the 5th generation, which refers to the 5th generation of the mobile or cellular networks.
Land acquisition: It is the process by which the government can take over land or property that is privately owned and utilize it for other purposes, especially for public benefits.
Lease modification: It is the newly made changes in a lease that weren’t initially included in the agreement.
Trunking: Trunking is the method that is used to accumulate multiple networks into a single one.
Town Planning guidelines:
Power Supply: In simple words, it is an electrical device that supplies power.
Personal data ordinance: https://www.pcpd.org.hk/english/data_privacy_law/ordinance_at_a_Glance/ordinance.html
Wholesale Conversion: https://wholesaleconversion.com
Grand Ming: http://www.grandming.com.hk/cht/
industrial revitalization 2.0: https://www.landsd.gov.hk/en/reIntBuild/index.htm
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Alright, let’s get back to the transcript of the show. Enjoy!
[00:00:00] [00:00:00] Darren Wong: [00:00:00] So Anthony, welcome back again.
[00:00:02] Anthony Wong: [00:00:02] Yeah, thank you. Thank you. It’s good to talk to you again, really.
[00:00:07] Darren Wong: [00:00:07] I mean, we do two shows and stuff like that.
[00:00:10] So the previously we’ve done a show just now about the research, for the audience who would be interested in learning how to do
[00:00:20] better research on locally or overseas investments. And then would you mind telling the audience who just jumped in without that context before about yourself? And then the episode before that,
[00:00:30] like, what’s that about?
[00:00:32] Anthony Wong: [00:00:32] So yeah, Hey, guys, everyone. If you haven’t checked out a video with Darren, please do check it out again. We talked about
[00:00:40] how to invest real estate proactively and in-depth. So once again, I’ll introduce myself, I’m Anthony Wong. I’m currently a research manager at Colliers
[00:00:50] International. I have an education background and real estate postgraduate degree, and have work experience in Greater China, US and now in Hong Kong. And I’m happy to give
[00:01:00] a little humble opinion about data centre, because this topic is really changing by the date. So really, can give out whatever I can take,
[00:01:10] and whatever I can get, and give my real estate research perspective on this topic, and pleasure to talk more about it.
[00:01:17] Darren Wong: [00:01:17] Yeah, and for the audience that didn’t check out
[00:01:20] the resource episode with you, please check it out. Because I think is a very good way to understand what it takes to learn about different assets. And in terms of how to
[00:01:30] do research and everything like that. And then we decided to do a data centre episode, because it’s something that I mentioned in the previous episodes that a lot of my friends are looking into, it’s a very, very hot
[00:01:40] topic, it’s very exciting. So I’m just very happy that you’re able to be here and share with us. So let’s kickstart right away. Why is data centre segment become
[00:01:50] such a hot topic recently?
[00:01:53] Anthony Wong: [00:01:53] Yeah, I mean, data centre is becoming a hot topic, not just in APAC, but globally. I think it’s because of the
[00:01:53]Anthony Wong:[00:01:53] 是的，我的意思是，資料中心正在成為一個熱門話題，不僅在亞太地區，而且在全球範圍內。我想是因為
[00:02:00] global awareness that in the future, AI and technology and data usage is going to be a huge demand. And on top of that,
[00:02:10] starting even a couple years back, data centres is already a growing kind of real estate sectors and technology sector and APAC region.
[00:02:20] This year with the COVID-19, lots of people are staying home, and they’re starting to be aware of the the demand side of what are the technology they
[00:02:30] can make, use and make leverage up when being at home, working from home either entertainment or working. And also work from home,
[00:02:40] these technologies, how are they shaping their lifestyle, right? So from the management side of these data centres, and from the investment side, it’s really
[00:02:50] changing by the day. So it’s really complex topic. And it’s something real estate practitioners, a lot of them themselves are getting themselves adjusted
[00:03:00] to this sector. And as you know, TikTok just purchased a European data centre in Ireland yesterday, they’re going through a lot of US complications, but
[00:03:10] they’re still investing quite a lot. And increasing cloud services, 5G implementation, a lot of
[00:03:20] companies and countries and regions are heavily dependent on this technology and will be for a lot of emerging economies. According some of the market projections,
[00:03:30] APAC will have about 13.5 billion network devices, connections by 2023. Now from 8.6 billion in 2018, so that’s 5
[00:03:40] billion of change. And also, the number of internet users will grow from 2018 2.1 billion to 3.1 billion in 2023. So
[00:03:50] the amount of data that’s related to that rusty said, was quite large, something that real estate practitioners who have to get into in the future.
[00:04:00] [00:04:00] Darren Wong: [00:04:00] Yeah. When I was three, four years ago, and then I’ve looked into it because of a friend of mine that was considering that, “hey,
[00:04:10] should I looking at data centre? Should I convert my building into data centre usage?”, which is coming in the next question, right? What are the requirements to convert a building
[00:04:20] to a data centre usage in Hong Kong, like in terms of like maybe floor loading, fire regulation and cooling? And at the same time is that, how many potential buildings can there be in Hong Kong to be converted?
[00:04:30] And lastly, always most important thing as an investor is that, what is the typical cost per square foot to be convert?
[00:04:40] [00:04:40] Anthony Wong: [00:04:40] Well, those are great questions, but I can’t comment too much on the prices, because it’s far fluctuating on different regions. So even if I give an average
[00:04:50] price, it might not reflect the overall data centre market. With the new bredding prices, shocking, just purchased somewhere around, I would say, 4 billion
[00:05:00] Hong Kong dollars for a site in in ShaTin, for data centre site. So, to answer your question, really simply, there’s three ways for data centre,
[00:05:10] real estate usage. One is wholesale conversion; another is land acquisition. And then the last is lease
[00:05:20] modification. I think the easiest pathway would be wholesale conversion, which is simply really the change in the use of parts of its existing building.
[00:05:30] So for example, you have an industrial unit already, how do you convert it with the existing, for example, power lines that is necessitated
[00:05:40] into the unit? What are the location that’s not affecting adjacent surrounding uses. So for wholesale conversion, there’s usually no fee for waiving
[00:05:50] any conditions for the change of use. The data centre takes place in the existing building, which is typically according to the lands department and the
[00:06:00] government regulations has to be 15 years older. And the proposed building has to be zoning, industrial, commercial, and old use or other
[00:06:10] specified uses business quotation. So, this is the easiest way in terms of cost flights. So if you’re able to convert into data centre, good for
[00:06:20] you. You can probably change it and if you are in trunking well, which there’s a lot of trunk lines powered by supporting that location, then there’s a high probability of
[00:06:30] going through that wholesale conversion. Another thing is land acquisition, which is a government land that’s issued for sale for data center. And that
[00:06:40] is usually a shootout in the lands department. And so, it’s usually a government site and from a land sale programme, stipulating data centres that what type of
[00:06:50] uses back can the investors have the buyers are able to purchase and really
[00:07:00] depends what location it is and where it is too. And the last one is lease modification. As we develop, so for example, you have an old
[00:07:10] industrial building in Kwai Tsing, for example, which is really hot for data centres right now, how do you redevelop into higher data centres. There’s also regulations. So
[00:07:20] for example, the data centre portion of the redevelopment should be at least 40% assessed based on the
[00:07:30] overall GFA. And another consideration is that the redevelopment has to take place on industrial block. So really, you have to look
[00:07:40] through the Town Planning guidelines that outlines zoning plans, look in the land lease and see what the specifications. And as investor, most of all,
[00:07:50] you need to consider land premium. And that is subjective based on your location and what type of data centre you’re issuing. And what kind of company, are you an overseas
[00:08:00] company, local company? And how long are you proposing this development site for? So these are typically the three pathways to
[00:08:10] go about on data centres development.
[00:08:12] Darren Wong: [00:08:12] I see. I assume that the electrical power grid will affect the potential probability of it. Is there any
[00:08:20] difference between, for example, the Hong Kong Island side and Kowloon side? And if so, is there any preference? Do companies normally do both or one of them?
[00:08:30] [00:08:30] Anthony Wong: [00:08:30] Yeah, that’s a good question. I’m not electrician, so I can’t comment the specifications of my research. I’ve read a
[00:08:40] lot about the macro side data centre, but digging down to the technicality, it’s a really complicated topic, which requires
[00:08:50] people with a substantial engineering background. So I’ll give you my two cents on it. I would say, in Hong Kong, really broadly, these principles are
[00:09:00] having reliable power supply. So for example, 99% reliability is really, really high. So specification, you can also look up into the guidelines
[00:09:10] from Hong Kong government website, and also the Hong Kong, low electricity cost is really what is attracting a lot of investors coming to Hong Kong,
[00:09:20] developing data centres, because the fact that Hong Kong is not only reliable, but these data centres are requiring huge amount of
[00:09:30] electricity usages on a daily basis. So you need to find locations that could support that, for example, you have to have a development that is on the trunk line, or the electricity line or power
[00:09:40] station that is able to support the data center development. Now having a lot of network connectivity, and Hong Kong is a good place, because its climate is relatively stable. So you
[00:09:50] don’t have really substantial typhoons that could tore down these electrical lines of buildings, though there is still risk out there. But we also don’t
[00:10:00] have the risk of earthquakes, such as Japan, such as some parts of Taiwan and places like that. So I think
[00:10:10] another thing of Hong Kong really that we talked about, and the Hong Kong data centre landscape is data protection, which is a lot of people are concerning, because the
[00:10:20] personal data ordinance, which is issued by the Hong Kong government protects personal data. And there’s a lot of controversy surrounding it because of the new NSL
[00:10:30] that’s coming in. But, this is still really, really attractive because of whether whatever happens, data is always going to be important, especially in a populated area,
[00:10:40] like South China, Hong Kong, Greater Bay Area. So I think it’s definitely, in terms of geographical region wise, [00:10:50] currently, I think Tseung Kwan O has a really good foundation for data centres because of its strong existing infrastructure.
[00:11:00] But you can look at emerging locations like Lok Ma Chau, Tuen Mun, that are actually gained attraction in terms of infrastructure building into the catering
[00:11:10] these data centres. So these will progressively be issued out by the government in terms of when these infrastructure could be built.
[00:11:18] Darren Wong: [00:11:18] I see. That’s very informative, by the way,
[00:11:20] thank you so much, because you cover a lot of ground: what’s most important about data centre, and why is there, and why isn’t there. So we talked about this before.
[00:11:30] Singapore and Guangzhou are very popular right now, where data centre type of assets, right? What’s the overall landscape in Asia? And how is Hong Kong positioned?
[00:11:40] And at the same time, who are the major players globally in the region?
[00:11:46] Anthony Wong: [00:11:46] Yeah, for sure. I think, to
[00:11:50] answer the global players first, you have Equinix, Global Switch, these are really, really large global companies. In Hong
[00:12:00] Kong, you have Sunevision, which is owned by Sun Hung Kai, I believe, correct me if I’m wrong, but this Sunevision is a big
[00:12:10] data centre operator that supports a lot of high tech IOT stuff in Hong Kong. So these are the local market periods. You have
[00:12:20] Grand Ming as well, which is also a semi local market player. Hong Kong is well positioned geographically, because it’s close to
[00:12:30] China. And China requires a lot of, for example, international data transporting hub, and Hong Kong can act as an intermediary, just like a financial hub, because
[00:12:40] data in the future is going to worth a lot of money as well. So Hong Kong is geographically advantageous. But yes, it is competing with Singapore, as you talked about.
[00:12:50] Singapore is the gateway to Southeast Asia. And it has some advantages: robust data privacy regulation, arguably stronger than Hong Kong.
[00:13:00] But Hong Kong does have that geographical advantage. Singapore in some way does edge Hong Kong a little bit in terms of the internet speed,
[00:13:10] because they have existing a little more robust infrastructure. And also, Singapore has more lenient
[00:13:20] land supply towards the sector. So they’re more willing for the market players to bring in more investment, because they’re all given a lot of land. I think a
[00:13:30] shortage of land supply in Hong Kong can be a problem, and has been a problem in the past. But Hong Kong government and various other consulting agencies are foreseeing
[00:13:40] a new document issuing, you have heard about in the policy address budget report yesterday, that industrial revitalization 2.0, that is going to be
[00:13:50] a positive factor in terms of issuing more land for industrial and high tech and for these startups to prosper. So, yes, we are
[00:14:00] in a tricky platform. But I think once these conflicts, such as the US trade war, COVID,
[00:14:10] and everything settles down, I think Hong Kong will emerge even stronger because of the geographical location. And the existing strong infrastructure, as we mentioned about the
[00:14:20] electricity supply, the amount of human capital that can support this kind of industry.
[00:14:29] Darren Wong: [00:14:29] I see. That’s
[00:14:30] interesting thinking about as grand scheme of thing, the geographical location, not only financial, it seems like even for the data side, the industrial side, it still have a
[00:14:40] benefit of it. And then I was planning to ask you more about the Guangzhou and Hong Kong relationship in terms of the data centre side. Would you mind to have some opinion on that?
[00:14:51] [00:14:50] Anthony Wong: [00:14:51] So Guangzhou and Hong Kong? Yeah, for sure. So, Hong Kong currently, in the north of Hong Kong, if you go through the
[00:15:00] border between Hong Kong and Shenzhen, there’s a place called Lok Ma Chau. So, not much always close to Hong Kong and Mainland China border, which is
[00:15:10] desirable for tech companies just across the border like Tencent, Baidu, Huawei, DJI, which is drone company. So there’s currently proposed 87
[00:15:20] hector of Hong Kong Shenzhen innovation and technology park at Lok Ma Chau, specifically catered towards R&D and technology, and startup incubators. So this kind of development will
[00:15:30] likely push even greater demand for data centres because of technology companies that are able to leverage upon Hong
[00:15:40] Kong because Tencent, we still don’t have a really popular usage of alipay and WeChat Pay in Hong Kong, we’re still relying on HSBC payme, right?
[00:15:50] So, when I was working in China, all these financial payment platforms, almost no one uses
[00:16:00] cash anymore. If you even go to rural areas, everyone except WeChat Pay, so you can tell how much of that financial data is really valuable and how much in relation back to data centres,
[00:16:10] how much that is indeed in need. And I would say another place in Hong Kong, not bordering China is
[00:16:20] Tuen Mun. It is a very strategic location, the link between Chek Lap Kok and Tuen Mun that is supposed to be completed in 2020. This will create a lot of long term
[00:16:30] development opportunities, giving a lot more opportunities, long term growth, because it’s close to the airport, which is an International Airport. So
[00:16:40] anywhere of these transportation hubs like borders and places with strong trunk lines and safe places
[00:16:50] in terms of geographically safe, stable climate wise, it’s a good place, and Hong Kong is at the right place of having that geographical
[00:17:00] and infrastructure advantage.
[00:17:01] Darren Wong: [00:17:01] I see. So what are typical yield on data centre compared to traditional industrial building? And how long the lease contract and
[00:17:10] operators are typical for? Lastly, what’s the trend over on the demand for data centre in those regard? And do you think that the next 5 to 10 years,
[00:17:20] it’s going to be good? What would you think of that?
[00:17:24] Anthony Wong: [00:17:24] Yeah, so the yield of the data centre is it’s about
[00:17:30] traditionally, it’s been about three 3.5%. It’s approaching 4%, because rents are really leveraging itself, which the yield is actually higher than
[00:17:40] grade A offices in Hong Kong, which is about a high 2%. So it makes an attractive investment, because we can have greater returns and
[00:17:50] typically more stable yields. Because usually, these contracts of the data centres, the leases range from 8 to 10 years or more, because you
[00:18:00] have really expensive equipment being shipped into these sites, right? So these racks, and usually these leases are longer because you want to protect these equipment
[00:18:10] longer and able to operate longer in a specific location and move to a different location, and there might be a lot of problem as well. So usually typical
[00:18:20] tenants like to stay in a data center longer. So that creates more of a stable yield, not just high yield, stable but high yield. And rents have been progressively going up, for
[00:18:30] example, this year, year-on-year has already gone up 5 to 10%, and depending on which region, right? So it is exciting. To answer where is the demand or where is the future trend going? There’s a lot of trend that is propelling the sector. And when you look at the COVID induced remote office solutions, and cloud computing, a lot of companies are willing for the employee to work from home or
[00:18:50] a rotational basis. I think Hong
[00:19:00] Kong, work from home is not going to be as impacted. For example, that notion is not going to come back. But for example.
[00:19:10] Places like San Francisco, which is tech, and in some places, you’re gonna drive an hour to your office. In Hong Kong, transportation still really convenient. So remote
[00:19:20] solutions in other areas that requires more working, transporting time will be really, really useful.
[00:19:30] As we talked about the MNC corporates and these high tech companies will obviously be at the forefront of
[00:19:40] driving this data centre use because of their data data demand. Another thing is online and retail e-commerce that’s been going on in 5 to
[00:19:50] 20 years almost, since Amazon came in and I think consumer demand is increasing and shifting towards online shopping. And retail should invest in online shopping
[00:20:00] platforms, and enhancing, for example, different distribution strategies. And these kind of online shopping requires a lot of
[00:20:10] data use as well. And data centre creates a really kind of roadmap for these different online shops can, as an intermediary, to give information for
[00:20:20] consumers and the owners themselves. And last but most, I think, data centre, it is emerging. But even further than
[00:20:30] that, there has to be more of a green and sustainable data centre development coming into play. As you know, data centre, as we talked
[00:20:40] about previously, data centres is really energy intensive. It provides a lot of power, and it consume a lot of energy. So
[00:20:50] the large operators, actually right now, like international operators, like Equinix, Equinix, has actually adopted renewable practice by using
[00:21:00] a lot of their electricity supply from renewable energies like solar power, wind power. They actually committed and a lot of companies will be
[00:21:10] following that, especially with the ESG and the post-COVID trend of environmental awareness, these companies are actually trying to achieve the 100%
[00:21:20] efficiency in terms of renewable energy. On top of that, you have a really great policy platform, such as the UN 2030
[00:21:30] sustainable agenda, ESG guidelines, as we talked about, which will even push these companies to go for renewable energy that is sustaining data centres. So I see
[00:21:40] this as a future pathway and how data centre is developed.
[00:21:44] Darren Wong: [00:21:44] And that’s very, very good. I think that’s a very good way to
[00:21:50] summarise too. There’s so many questions popping up in my head right away, but I’ll leave it for asking you on your profile and for Denzity profile and everything and more and more. And then so for people who might
[00:22:00] want to know more about this segment and the previous episode of research and so on, what are couple ways that people can find you, know more about you and your work?
[00:22:09] Anthony Wong: [00:22:09] Yeah,
[00:22:10] for sure. So, we have published a data centre report in April so even go on google and type in data centre, future landscape data centre
[00:22:20] specifically and you type it in and type in Colliers International. We actually did a 14-page report specifically analysing locally based in Hong Kong, where to invest in data
[00:22:30] centre. We have a strong research and evaluation team, if you’re more interested and have investment thoughts or just curious about this
[00:22:40] sector, feel free to just take a look at the document or reach me out, or reach our company, some of the representative. But my email is
[00:22:50] [email protected] Make use of those reports and give you a perspective on where our data centres moving towards. And then we give a lot of insights, how not only Hong Kong itself and how our
[00:23:00] international forces like we talked about Singapore, how are we competing with our competitors? So, do feel free to reach out via my email address
[00:23:10] or take a look at our reports.
[00:23:13] Darren Wong: [00:23:13] That’s great. Obviously, as I said before, I’ll have everything in the show notes. And I want to say thank you so much. Thanks for sharing
[00:23:20] with us. And then I, even myself personally, I learned a lot through your sharing. And then hopefully, you can come back for round two, because, just alone, I’m sure if I come to the next
[00:23:30] segment, let’s say, in the future maybe retail or office or anything big changes, your one of the first person I’ll talk to see, hey, Anthony, just come on board, round two again. So thanks
[00:23:40] a lot for your time and effort. Because it’s something that like I care about is that people know more about what’s going on, and niche market that data centre, industrial, different sections of it,
[00:23:50] too. We can cover that in the future. So thanks a lot again.
[00:23:52] Anthony Wong: [00:23:52] Yeah, for sure. It’s my pleasure. This sector is changing quite a lot. So for sure, the next time we chat about it, we’re going to see new
[00:24:00] exciting things coming in, for example, the transaction by TikTok, yesterday, it was quite exciting. So it’s a very exciting topic to talk about. And thanks for having me here. For sure.
[00:24:09] Darren Wong: [00:24:09] Okay,
[00:24:10] thank you. See you next time, then. Thank you.
[00:24:12] Anthony Wong: [00:24:12] Yeah, for sure, have a good one. Take care. Bye bye.
[00:24:14] Darren Wong: [00:24:14] Bye.