PETALING JAYA: The data centre (DC) sector is in a reset mode – from rapid expansion, toward a model that aims for sustainable growth.
S&P Global Ratings said in a report that tougher regulatory approvals and the imposition of higher utility costs will naturally prioritise the quality of DCs over quantity.
“This will buy the country time as it expands the necessary power and water resources to sustainably grow into one of South-East Asia’s largest DC hubs,” it added.
The ratings agency reckoned demand will stay through Malaysia’s reset, given the country’s location and other supportive factors.
“Still, Malaysia will have to overcome execution risks. Any delays in the planned power or water rollouts would bottleneck growth in DCs.”
Funding, it noted, is another critical issue as financing needs are likely greater than domestic banks can accommodate.
It said operators with good financing access have a leg up in this race.
“While public credit for DCs is still nascent in Asia Pacific, Malaysia’s robust solvency framework and established capital markets position it favourably against South-East Asian peers,” it added.
An analyst agreed, but told StarBiz that the country needs to really proritise other factors alongside the expansion in DCs.
“It needs to sort out things like water and energy resources, for example, as DCs are huge gobblers of these,” he said.
Meanwhile, S&P noted that Malaysia’s draw lies in its proximity to Singapore and extensive sub-sea cable networks, cost efficiency relative to Singapore, and availability of land.
Looking past the noise on higher costs and resource sufficiency, the country’s draw remains “intact and unique”, it noted.
S&P said growth should remain solid at an approximately 32% compounded annual growth rate (CAGR) for DC capacity over the next five years, cooling from a 67% CAGR in 2020 to 2025.
The Johor state, in particular, first gained spillover demand after Singapore put a moratorium on new DC builds from 2019 to 2022, it noted.
The ratings agency said Malaysia’s supportive government policies will feed further demand.
For example, the “Green Lane Pathway” launched in 2023 by Tenaga Nasional Bhd
aims to reduce power approval lead time for DCs to as little as 12 months, from 36 to 48 months previously.
This is highly competitive globally – significantly faster than the United States and European Union (up to seven years), and most major Asia-Pacific hubs, including Singapore, Seoul, and Sydney (three to five years), or Tokyo (10 years), it noted.
The nascent Johor-Singapore Special Economic Zone – whose master plan will be unveiled in the coming months – is also likely to further encourage DC builds in Johor, it added.
That said, it believes the country’s cost competitiveness has eroded, with power costs now slightly above average versus South-East Asian peers.
Construction costs remain average against other key DC markets in this region, it said.
“Despite this, we believe demand is unlikely to shift from Malaysia to neighbouring countries on cost alone.
“Malaysia’s strategic location remains its largest advantage.”
Similar resource scarcity and reliability challenges across the region suggest that any large-scale expansion in neighbouring markets would likely also be met with rising infrastructure and associated costs, S&P added.
