China’s stride into fifth-generation mobile telecommunications technology and the booming e-commerce sector are elevating the value of Internet data centres (IDCs), making them a viable investment for alternative asset managers.

The trend is supported by the emergence of powerhouses such as Huawei Technologies and Tencent Holdings, whose growth is driving the construction of purpose-built IDC facilities to house high-powered servers, data storage systems and network support under one roof.

“The prospect of IDCs in mainland China is very bright given the phenomenal growth of e-commerce and hi-tech industries,” said David Ji, research head for Greater China at Knight Frank. “Demand for facilities like data centres, business outsourcing providers, and Internet infrastructure is very strong.”

IDCs are secure, temperature-controlled facilities equipped with multiple power sources and high-bandwidth Internet connections. These purpose-built facilities are used by enterprises to remotely store large amounts of data, manage business applications and host cloud computing operations.

China’s overall IDC market size was about 85.8bil yuan in 2018, accounting for 11% of global size, according to a recent report in IDC Quan. Backed by a surge in datacentre services and cloud computing, the volume is forecast to reach 150bil yuan in 2020.

Yet, acquisitions of onshore IDC properties by local and foreign investors have been relatively small at about US$155mil this year, according to Real Capital Analytics, after rising more than half to US$294.3mil in 2018. The pace could quicken as investors like Gaw Capital Partners make their moves.

The Hong Kong-based real estate private equity fund last month unveiled a partnership with Centrin Data to build a portfolio of “hyperscale IDCs” in Tier 1 and 2 cities along China’s eastern coast.

Their first seed project is the Huaqiao Project located in Kunshan, Jiangsu, which is located about 40km outside Shanghai. The project is affiliated with Shanghai’s national-level internet exchange point and is being developed in two phases covering 300,000 sq metres (3.3 million sq ft) of gross floor area.

Phase 1 is occupied by a “top internet company” with 6,400 datacentre racks available, while Phase 2 will offer at least 25,600 racks to potential customers upon its completion early next year, according to a Nov 8 statement by Gaw Capital.

“We see significant opportunities in the IDC sector, which is fast becoming a major theme in China as the country deepens its embrace of advanced technology,” said Christina Gaw, managing principal and head of capital markets for Gaw Capital. The firm is starting an “IDC Fund” to capture the growth in these facilities, she said.

China has been encouraging a wider use of Internet technology in state and private businesses, bringing about disruption in the economy and creating world-beating technology companies. The proliferation of mobile payment systems has been a lightning rod in fuelling the demand for IDC infrastructures, Knight Frank’s Ji said.

“As the society goes paperless, there is more and more demand for information processing,” he said. “This is the reason why datacentres are in demand.”

The growth is also well supported by a wide range of end users, not only in the hi-tech sector, according to Steven Xing, head of alternative investments for Greater China at property consultancy JLL.

“IDC serves a broader range of clients than some of the other asset types do,” Xing said. “Any operational corporations with a demand of data storage and processing could be the end users of IDCs.”

 - South China Morning Post