• Robust secular growth expected for data centres
• Singapore has positive demand-supply dynamics
• Keppel DC REIT a key proxy to play this theme

Data Proliferation Fuels Secular Demand for Data Centres

A data centre is a facility specially designed to house hardware equipment and software systems that support the IT system of businesses. The missioncritical nature of this support requires data centres to be equipped with additional features like a cooling system, uninterrupted power sources and multiple back-up generators that are not found in standard storage facilities.

The data centre industry is becoming increasingly important with the exponentially growing demand for data and server support. Businesses are moving towards cloud computing solutions as they undergo digital transformation to increase operational efficiency and leverage on big data analytics to drive growth, with the outsourcing of data centre needs an increasing trend.

Countries across the world are pouring investments into smart city technologies like autonomous vehicles and Internet of Things (IoT) that require huge volumes of data to be generated, stored and processed. According to the Cisco Global Cloud Index, annual global data centre internet protocol (IP) traffic growth is estimated to grow at a compound annual growth rate (CAGR) of 25% to reach 20.6 zettabytes in 2021 from 6.8 zettabytes in 2016.

APAC the Fastest Growing Market, With Singapore as the Region’s Crown Jewel

Nine of the world’s top 15 fastest growing data centre markets were located within APAC. We view Singapore as the region’s crown jewel in the data centre industry. It has one of the lowest latencies in the region, thus resulting in fast connectivity. Other positive attributes include a stable business environment, ready pool of skilled labour, and being free from natural disasters. Demand and supply dynamics are positive, as new demand CAGR of 9.4% from 2018-2022 is expected to outstrip supply growth (CAGR of 2.1%), based on data from BroadGroup Consulting.

Gain Exposure Via Keppel DC REIT; Await Better Entry Point for Mapletree Industrial Trust

Key global industry players include Equinix Inc., Digital Realty Trust and QTS Realty Trust. In this region, we identify GDS Holdings and SUNeVision as high growth players. For Singapore proxies, we view Keppel DC REIT (KDCREIT SP) [BUY; FV: S$1.93] as a key beneficiary of the growing popularity of colocation data centres (allows businesses to enjoy lower fixed costs of facility management, maintenance, security and infrastructure due to economies of scale from a larger tenant base), given that 75.4% of its rental income is derived from co-location leases.

KDCREIT has also been consistently building up its track record since its IPO in Dec 2014 and has one of the fastest projected growth in DPU among our S-REITs coverage. To a much smaller extent, Mapletree Industrial Trust (MINT SP) [HOLD; FV: S$2.29] also has exposure to the data centre industry, which contributed 17.7% of its AUM (as at 30 Jun 2019). We would, however, await a better entry point of

Source: OCBC Research - 25 Jul 2019