Vietnam becomes a hotspot in the Asia-Pacific data center market

DNHN - The data center market in the Asia-Pacific (APAC) region is rapidly growing, yet faces significant challenges in ensuring suitable land and stable electricity supply.

Overview of the Asia-Pacific data center market

The Asia-Pacific (APAC) region is witnessing a rapid expansion of the data center industry, with various types of data centers proliferating. According to estimates by Structure Research, the colocation data center market (data center colocation services) in the APAC region is booming with a 13.3% growth rate every five years, expected to reach 19,069 MW of critical IT capacity by 2028, nearly double that of 2023.

According to Mr. Thomas Rooney, Senior Manager of the Industrial Real Estate Department at Savills Hanoi, there are two main reasons for the explosion of data centers in the APAC market. First, this growth is driven by digitalization, the adoption of cloud computing, high-data-use services, the development of 5G networks, the Internet of Things (IoT), and local data storage regulations.

The advent of artificial intelligence (AI), especially ChatGPT and generative AI tools, also boosts demand in the data industry, particularly for hyperscale data centers with significant IT capacity. Leading technology corporations such as Amazon Web Services, Microsoft, and Google have been actively leasing and developing hyperscalers, accounting for 60% of the global hyperscale data center capacity.

Moreover, high borrowing interest rates, which are expected to continue rising, along with the Federal Reserve (USA) delaying interest rate cuts, have made investors' pursuit of returns more vigorous. Against this backdrop, the data center market has emerged as an attractive alternative asset class, offering better returns and significant growth potential, drawing investors.

Savills reported that in Q1/2024, data center acquisitions in the APAC region peaked at $1.7 billion, up 81% from the previous quarter and 325% from the same period last year, accounting for 80% of the total investment volume for 2023.

However, ensuring suitable land and a stable power supply has become a major challenge for the data center market. Data center locations need to be near essential infrastructure such as power grids and internet systems. The high energy consumption of large data centers like hyperscale increases pressure on local power grids, causing latency and operational issues. The search for land and power has pressured developers to scale up at strategic locations as soon as possible, further driving up development costs. Additionally, stakeholders including the government, customers, and society require data centers to use renewable energy sources and reduce their carbon footprint, adding significant pressure on data center developers.

The rise in initial investment costs, electricity tariffs, and operational and maintenance expenses has made data centers a capital-intensive investment. Consequently, there are increasing collaborations between investors and data center operators to accelerate expansion. For instance, GDS raised $587 million through a share transfer agreement, while KKR committed up to $800 million to acquire a 20% stake in Singtel's regional data center business. The proceeds will be used to expand in ASEAN markets, including Singapore, Indonesia, and Thailand, while exploring markets like Malaysia.

Rapid growth and significant potential in the Vietnamese market

Vietnam is rapidly developing in the region, with the market value forecast to rise to $1.04 billion by 2028, from $561 million in 2022, achieving a compound annual growth rate (CAGR) of 10.7%.

Mr. Thomas Rooney explained: "Vietnam has 33 data centers with a total of 48 service providers and an estimated capacity of about 80 MW as of Q1/2024. The northern and southern regions account for 94% of the existing data center supply, with the central region only accounting for 6%. The main centers are located in Hanoi and Ho Chi Minh City, with 16 and 13 established facilities, respectively. Therefore, the demand for industrial land to build data centers is increasing in urban areas like Hanoi and Ho Chi Minh City".

To encourage the development of data centers in Vietnam, the government is accelerating digital transformation, with initiatives aimed at positioning the country as a significant digital hub in the region. The government-backed Digital Transformation Program aims to transition 50% of businesses to digital platforms by 2025. Vietnam's 5G connectivity also supports the deployment of edge data centers and provides low-latency connectivity to end-users.

"The development of data centers requires significant infrastructure investment, from ensuring a stable power supply to building modern facilities. This contributes to increasing land prices and industrial real estate rental costs in the northern and southern regions, while creating attractive investment opportunities for real estate investors and infrastructure developers", added the Savills expert.

Currently, the data center landscape in Vietnam is primarily dominated by a few local telecommunications companies, including Viettel IDC, VNPT, CMC Telecom, FPT Telecom, and VNG Cloud. Meanwhile, foreign operators like GDS, Telehouse, and NTT typically enter the market through joint ventures, accounting for a much smaller market share.

However, Savills has witnessed increasing demand for data center locations from foreign operators. For example, Amazon Web Services announced the launch of edge data centers in Hanoi and Ho Chi Minh City in August 2022. The Chinese tech giant Alibaba also announced plans to build its data center to comply with local regulations on data storage. Although specific details such as costs and timelines have not been disclosed, the company expects to invest over $1 billion in this project, demonstrating its confidence in the Vietnamese market.

Currently, foreign companies must enter into commercial agreements with a Vietnamese telecommunications company to provide domestic data center services. However, this situation may soon change. Vietnam's Ministry of Information and Communications recently proposed a Draft Decree detailing several articles and measures to implement the 2023 Telecommunications Law, which will allow direct foreign investment and 100% foreign ownership in providing data center services, OTT services (over-the-top internet communication services), and cloud computing services. The 2023 Telecommunications Law will take effect on July 1, 2024, and policymakers expect the Draft Decree to be finalized and issued on the same date.

In this context, Thomas Rooney emphasized: "Savills expects a significant amount of capital to flow into the Vietnamese market as policies and regulations become clearer".

Nghe Nhan