Data centres, where rows of servers quietly store and process terabytes of digital information, have become a magnet for Malaysian investment. In the latest announcement from the sector, Amazon Web Services (AWS) in August added a new region to its cloud computing infrastructure, powered entirely by Malaysian data centres. It has committed to invest around RM29.2 billion (USD6.2 billion) in Malaysia by 2038.

The rapid growth of data centres is a boost for Malaysia’s economy and underlines the country’s investment appeal in an increasingly competitive area. The data centre market in Asia Pacific is projected to grow by 12.6% a year, reaching USD71.7 billion by 2032 as businesses and consumers embrace advances in digital technology.

In that context, Malaysia’s recent success leaves the country well positioned for the AI era.

Investments in data centres and related infrastructure have soared in recent years, pulling in RM76 billion from 2021 to March 2023. That has catapulted Johor and Kuala Lumpur (Klang Valley) into the top 10 data centre locations in Asia Pacific, now ranking seventh and eighth on an annual survey of established data centre locations.

The benefits to Malaysia go beyond the direct investment windfall. Specialised digital infrastructure has a powerful multiplier effect on the economy, creating quality jobs and creating opportunities for other businesses in the digital ecosystem.

Data centres require specialist IT equipment, power, and cooling systems – all of which need planning, engineering and technical expertise. While the heavy lifting is done in the construction phase, data centres are high-maintenance assets even when they are operating. Any power outage or service interruption can have serious consequences. Hardware also needs to be regularly upgraded to keep pace with technological development – especially in light of the rapid growth of data-intensive AI applications.

As Malaysia’s data centre ecosystem matures, there is an opportunity for local suppliers to develop skills and components to support the sector’s growth. Microsoft, for example, aims to provide training opportunities for an additional 200,000 people as part of its US$2.2 billion (RM9.6 billion) investment in Malaysian data centres.

A thriving data centre sector also positions Malaysia well for the digital infrastructure needed for the AI era.

Maintaining the growth of the sector, however, will become increasingly difficult as other markets compete for their share of the opportunity. Access to financing will be critical to continued growth and HSBC is committed to supporting operators in building or expanding their data centre footprint.

Malaysia has a number of conditions in its favour. It benefits from a strong geographical location in the centre of a thriving Southeast Asia, as well as strong international connectivity through access to 22 submarine cable networks. It also boasts a large landbank, compared to neighbouring Singapore, which has restricted new data centre projects in recent years to curb energy consumption.

Beyond these innate advantages, Malaysia has also worked hard to attract investment in the sector, with a range of tax allowances and other incentives. The Malaysia Digital Economy Corporation, part of the Malaysia Digital initiative, is a key enabler.

Looking to the future, sustainability factors will become increasingly important, given the high-power consumption of data centre facilities. The global technology companies that account for a large proportion of data centres’ capacity are looking for facilities powered by renewable electricity as they work to reduce their environmental impact worldwide.

As well as electricity to power the servers and cooling systems, data centres use large amounts of water to remove the heat generated by the IT equipment. That presents additional challenges, especially in an area where competition for water resources is high.

Direct-to-chip and immersion cooling systems can be much more efficient, but they come at a cost. The government can help steer the industry in a more sustainable direction by encouraging and incentivising efforts to improve power and water efficiency, such as through investment tax allowances to cover up to 100% of capital expenditure on green technology projects.

Guidelines on energy and water consumption are also expected soon and could provide further clarity for potential new entrants by aligning Malaysia with international standards.

Progress on the energy transition will also be important. Pressure from hyperscale customers is already accelerating the growth of renewable energy, and recent reforms have been well received by the data centre sector.

Corporate virtual power purchase agreements, for instance, allow data centres to source renewable energy under Malaysia’s Corporate Green Power Programme. One of our clients, AirTrunk, has used this framework to purchase 30MW of renewable energy from a new solar power plant for its new hyperscale facility in Johor Bahru.

The government’s new Corporate Renewable Energy Supply Scheme, announced in July, will give data centres more options to source clean power by allowing direct negotiations between electricity buyers and renewable power operators.

In the longer term, however, the continued growth of the data centre sector will add to the pressure on Malaysia to decarbonise its national grid.

Major new data centres are major investments, with construction costs running into the hundreds of millions of dollars. As the sector grows, that kind of capital expenditure will need a broad base of support from Malaysia’s financial markets. HSBC, with a strong balance sheet and deep connections with local and international investors, is uniquely positioned to help businesses access the right opportunities.

Banks will have a big part to play, of course. Asia Pacific’s biggest data centre businesses have enjoyed a strong response to international financings, such as last year’s A$4.6 billion (RM13.5 billion) syndicated loan for Australia-based AirTrunk, supported by HSBC.

As the sector matures, capital markets will become more relevant, too. Bonds and sukuk could complement commercial bank financing, and reliable cash flows in the sector can allow mature operators to consider an equity offering or recycle their capital through a real estate investment trust.

Growth capital can also be sourced from private equity investors or public markets. A listing on the Kuala Lumpur Stock Exchange, for example, would give an ambitious data centre company a long-term platform for repeat capital raising. IPOs are reported to be under discussion.

In a future where AI and digital technology is an expectation, not an exception, data centres will be an essential part of any economy. The growth of Malaysia’s digital infrastructure has a long way still to run.