This article first appeared in Forum, The Edge Malaysia Weekly on June 10, 2024 - June 16, 2024

When even non-property players get into the data centre act, any seasoned investor will sense that the hype surrounding such facilities has already peaked.

In that light, the fact that even Jakel Group, which is better known as a textile giant with a strong retail presence, is jumping on the bandwagon of building data centres is a wake-up call for investors betting on the data centre play.

Jakel joins a series of property developers announcing ventures involving the building of data centres in the country.

In the last two weeks, Mah Sing Group Bhd (KL:MahSing), UEM Sunrise Bhd (KL:UEMS) and Sime Darby Property Bhd (KL:SimeProp) have announced the setting up of data centres. They join a long list of players who have already started building data centres in Cyberjaya and Johor.

One of the biggest data centre providers in Cyberjaya is Telekom Malaysia Bhd (KL:TM), which operates seven facilities there. The other big players in Cyberjaya are NTT and Bridge Data Centres, a company linked to ByteDance Ltd, which is the major shareholder of TikTok.

In Johor, four data centre parks have attracted a host of international players, including Equinix of the US, China-based Yondr Group, Bridge Data and Keppel Data Centre and Robert Kuok-backed K2.

Among the newer names is YTL Power International Bhd (KL:YTLPOWR), which is spending some RM15 billion over the next seven years to build a data centre industrial park with a 500mw renewable energy plant. YTL Power has teamed up with Nvidia Ltd of the US to supply its data centres with super- computers, a move that some analysts feel gives it the edge over others.

The irony of the YTL Power data centre story is that it started by acquiring a 664-acre plantation in Johor from Boustead Plantations in 2021 for RM428.8 million. Late last year, the company announced its tie-up with Nvidia.

YTL Power has not seen any earnings yet from the data centre business. Yet, its data centre story has captured the imagination of investors, largely due to its association with Nvidia.

YTL Power’s market capitalisation was just above RM20 billion at the start of the year. Today, it is almost RM40 billion. Its value has gone up 100% as investors ride the euphoria over data centres.

Generally, analysts have a positive call on YTL Power. Whether the earnings from the data centre business is a game changer for the company is left to be seen.

As for Boustead Group, it is still struggling with debts. Even if Boustead had created half the value of YTL Power, its debts would have been settled. That’s the sad state of a government-linked company (GLC) where all big decisions have to go through politicians.

The data centre story will not last long. It is fast becoming a property play and an over-supply is in the offing.

Johor became a key state in this story for two reasons.

One, its proximity to Singapore, which is a global hub for subsea cables — the city-state is the landing point for more than 16 subsea cables that are connected to every continent.

Two, Singapore was an early mover in the data centre business. However, in 2019, it imposed a moratorium on data centres. The moratorium was lifted in January 2022 when Singapore embarked on a pilot project to build state-of-the-art tier 1 data centres.

After a long process, four applications out of more than 20 were approved recently. The capacity is for 70mw with another 300mw to be made available in stages.

Johor benefited from the squeeze in Singapore, which incidentally is easing up now.

Johor Corporation started a data centre park called Sedenak, which attracted several notable names. It was followed by GDS Group of China and YTL Power. Last week, UEM Sunrise entered an agreement to develop a data centre in the state.

At the moment, there are 13 data centres in Johor and another four are being built.

As for Cyberjaya, there are more than 40 data centres there and many more new ones are coming up. According to a 2023 study by a consultancy, the current supply pipeline expected for Cyberjaya’s data centre market over the next five years is more than eight times the existing live supply, indicating intense competition.

This is particularly for data centres built as colocation spaces, which cater for several customers and are leased out for between three and five years with a renewal option.

The question is, what happens if there is no renewal? The utilisation rate will drop significantly. This can be the case particularly for old data centres.

For instance, Singapore-listed Keppel DC Ltd has a data centre in Cyberjaya that has a utilisation capacity of only 40%. It is an old facility that was built more than 15 years ago.

Many who are going into building data centre facilities will fall off, especially if the utilisation rate drops.

Also, the cost of keeping a data centre relevant to customers will keep increasing because of the advances in technology.

Technologies such as artificial intelligence (AI) and autonomous driving, growing e-commerce and cashless payment systems, gaming and streaming underpin the demand for hyper-scale data centres.

The increasing digitalisation of the economy and demands of customers will force data centre owners to invest in new super computers.

So far, the main beneficiaries of the data centre play have been the property players, the contractors who build the data centre facilities and landowners who sell their assets to multinational companies (MNCs) such as Microsoft for them to build purpose-built data centres.

Among the landowners, Crescendo Corp Bhd (KL:CRESNDO) and Paragon Globe Bhd (KL:PGLOBE) have sold land outright to MNCs to build data centres. Crescendo sold four parcels to Microsoft while Paragon Globe sold a huge parcel to Bridge Data Centres Malaysia IV Sdn Bhd.

However, there has been no job creation, without which the long-term multiplier effect of data centres on the economy is limited.

For instance, the electronics industry has a huge multiplier effect on the economy because it employs thousands of people and more new companies are coming into Malaysia to set up their assembly plants.

In the case of data centres, these do not employ people in the hundreds of thousands. They offer a few high-paying jobs.

At the moment, the construction companies are enjoying the data centre boom. But sooner or later, the building of data centres will stop because of an over-supply situation.

At that time, the trickle-down effect on the property and construction companies will fade as well.

M Shanmugam is a contributing editor at The Edge

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