Data centres – beware of the pitfalls

Malaysia has become a hotspot for data centres for a confluence of reasons.

FOR the local bourse, the first half of the year has been driven by some key market themes and among them is the data centre theme.

Malaysia is now the hotbed for data centres in Asia, as the country is now attracting billions of investments into the sector, driven by three key factors – relatively cheap land, good infrastructure and government-led efforts in attracting multinationals to set up shops in the country.

With the likes of Google, Microsoft, Amazon and Nvidia, Malaysia has attracted huge investments in new data centres as well as cloud services and artificial intelligence (AI) projects.

Some of these big names are entering the market by acquiring landbank while others are in collaboration with local players.

Having said that, prior to this frenzy into the data centre business, Malaysia already had some well-established names including AIMS Data Centre, Telekom Malaysia, NTT Global Data and Bridge Data Centre (BDC) operating in the country.

According to a recently published report by Savills Research on “Asia-Pacific Data Centres”, Malaysia is one of the fastest-growing markets for data centres as the country is presently connected to 29 submarine cable networks with 14 landing stations.

The government also supports data centres being set up in the country via various tax incentives and subsidies, including exemptions or reductions in income tax, import duties and sales taxes for qualified data centre operators.

Big numbers

Malaysia has attracted some RM114.7bil worth of investments in data centres and cloud services between 2021 and 2023 and this number must have increased by 30% to 40% this year alone, judging by the slew of announcements by major corporations.

Sadly, data centres, cloud services or even these AI-related investments do not create mass employment but a highly skilled workforce is necessary.

It is estimated that some 2,325 high-value new jobs in specialised fields including data scientists, data analysts, data engineers, cybersecurity analysts and network engineers will be required to run these centres.

Much of these new investments that are pouring into the country have been focused on Johor as the new data centre hub for the region. Places like Sedenak and increasingly other parts of Iskandar Puteri and Mukim of Pulai are now being scouted by big names to host new data centres. Johor-based property companies have been quick to offload some of their landbank to foreign investors while some property players saw an opportunity to enter the field by building their data centres.

To-date, some 425 acres worth about RM1.95bil have been sold to data centre operators in Johor alone, with the biggest land seller being Crescendo Corp Bhd (149 acres worth RM791mil) and the biggest buyer being Microsoft Payments (209 acres worth some RM850mil).

According to a Johor State Exco member, nine data centre projects with a combined capacity of 1,280 megawatt (MW) have been completed in Johor and six others with a total capacity of 1,490MW are in progress, while 30 others are at discussion and approval level.

Among other property companies, Sime Darby Property Bhd has entered into a build and lease agreement to develop a RM2bil hyperscale data centre located at Elmina Business Park in Selangor.

Meanwhile, in the case of Mah Sing Group Bhd, it has entered into a joint venture with BDC to initially develop a 17.55-acre site in Southville City, Bangi, with a planned capacity of 100MW.

Others joining the fray include Jakel Group, which is taking up a 40% stake in Pi Data Centre to develop a 51MW RM1.2bil data centre in Cyberjaya.

The biggest winner in the Malaysian data centre boom is indeed Tenaga Nasional Bhd (TNB).

The Savills report mentioned earlier highlighted that TNB had so far received 74 applications from data centre players with a maximum demand capacity of 11,000MW in the first quarter of this year.

Of course, not all will materialise but TNB itself sees potential demand in excess of 5,000MW by 2035.

Other winners include the construction boys, equipment suppliers as well as the logistics sector, which will benefit from the massive investments over the next decade.

Environmental concerns

As data centres require significant amount of energy and water, their environmental impact cannot be discounted. This is not only due to the large power needs of these guzzlers but also the high usage of water – which is increasingly scarce in Malaysia.

Data centre hotspots in the Klang Valley and Johor would need to ensure they have the required water supply, as the current reserve margin is just 12% for Air Selangor (Source; Air Selangor 2022 Annual Report) and 17% for Johor Baru (Source: Ranhill Bhd’s 2023 Annual Report), following the completion of the 160 million litres per day Sultan Iskandar 2 Water Treatment Plant, Phase One.

While plans are underway to increase the water reserve margin to 20% in Selangor by 2030, and at the same time, there are massive investments to reduce non-revenue water in these two states, it is hoped that demand for water by newly set-up data centres will not disrupt the water supply for other consumers.

As it is, we have been facing severe water issues, both in terms of supply and quality.

Besides water usage, the energy consumption of data centres also raises concerns about greenhouse gas emissions and waste production. How these data centres operate must be clearly defined, monitored and measured to ensure they are not environmentally harmful.

Social issues

Malaysia has become a hotspot for data centres for a confluence of reasons but the avalanche of data centres to be set up in the country will not significantly alter the demand for labour. Typically, data centres employ a small but highly skilled workforce, hence limiting its ability to provide mass employment.

Still, there could be positive spillover from the construction-based companies involved in the development of data centres that demands higher labour input. Construction companies and suppliers of building materials will be the key beneficiaries.

This can be seen from the recent award of large contracts worth almost RM6bil in total to companies like Gamuda Bhd and Sunway Construction Group Bhd.

Land acquisitions

We have seen many land parcels change hands due to acquisition by large multinational companies. While land transactions are state matters, the approval of the Economic Planning Unit (EPU) is still required and there have been recent cases where land sales were not approved.

The case in point was the proposed sale of land by S P Setia Bhd to Scientex Bhd whereby the approval of both the Estate Land Board and the EPU was required and the latter’s consent was not obtained.

An EPU approval is required for the purchase of property valued at RM20mil and above whereby the acquisition is carried out by a non-bumiputra from bumiputra and/or a government agency.

An indirect purchase of a property company, via the purchase of shares, which increases the ownership of the company to more than 50% also requires the approval of the EPU.

For most of the above land sold for data centres, conditions precedent are less stringent as only the state authority’s consent pursuant to Section 433B of the National Land Code in relation to the purchase of property by any foreign interest is required and in some cases, the EPU approvals were necessary as well.

Hence, as the government is promoting Malaysia as a data centre hub, it is likely that the EPU would grant consent for exemptions sought by foreign-owned companies.

Pros and cons

Led by the spectacular gains in Nvidia Corp, which is now the world’s largest company in terms of market capitalisation, Malaysia has emerged as the centre of attraction for newly established data centres in the region.

While we welcome these investments, there are indeed pitfalls that one should be concerned about, especially those related to environmental issues, energy demand, water shortage, land sales as well as the potential oversupply of large-scale data centres.

On the flip side, the massive investments brought by these MNCs are surely welcomed as they will strengthen our ringgit, potentially attract high-skilled workers as well as provide the spillover effects to companies involved in setting up data centres, especially those in the construction industry as well as building material and component suppliers.

Pankaj C. Kumar is a long-time investment analyst. The views expressed here are the writer’s own.