KUALA LUMPUR (July 20): Malaysia’s data centre developers may need to look beyond traditional bank financing as the sector faces funding requirements of more than US$20 billion (RM81.9 billion) over the next three years, according to S&P Global Ratings.

The funding is expected to support the development of powered shells, power and cooling infrastructure, and equipment, excluding additional costs for advanced chips.

While Malaysia’s banking sector remains well capitalised, S&P in a statement on Monday said domestic banks may face limitations in supporting the scale of upcoming data centre investments due to sector concentration limits and the increasing size of projects.

As a result, developers are expected to explore alternative funding sources, including project financing, private credit, and structured financing, to bridge the funding gap.

Project financing could help support large-scale developments by managing construction risks, while private credit may provide more flexible financing options. Structured financing, such as asset-backed securitisation, could also gain traction as more data centres are completed and investor familiarity with the sector improves.

S&P said Malaysia is slowing its data centre expansion to focus on sustainable growth, with success depending on securing funding and improving key infrastructure. 

It still expects Malaysia’s data centre capacity to nearly triple by 2030, growing at a 32% compound annual growth rate, supported by its strategic location, lower costs than Singapore, strong connectivity, and available land.

Stricter approvals and higher utility costs are expected to encourage better-quality data centres rather than rapid expansion. For example, Johor has halted approvals for Tier 1 and Tier 2 data centres that are significantly less water and power efficient.

Despite this, data centres could account for around 31% of Malaysia’s electricity demand by 2035, from 7% currently, requiring power capacity expansion from about 27GW to 40GW. 

S&P said Malaysia’s cost advantage has weakened, with electricity costs now slightly higher than the average among Southeast Asian countries. Construction costs remain average compared with other regional data centre markets.

Despite higher costs, data centre demand is unlikely to move to neighbouring countries because Malaysia still has key advantages like its strategic location, strong connectivity, available land and growing infrastructure capacity.

Other Southeast Asian countries also face similar challenges, such as limited power and water resources, which could lead to higher costs as they expand.

Johor remains the dominant data centre hub, accounting for about 80% of Malaysia’s leased data centre capacity, followed by Cyberjaya (14%) and Kuala Lumpur (5%).