Data centers are likely to be a key investment focus for Asian real estate investment trusts as more companies seek to become increasingly digital, according to a report by property consultant Cushman & Wakefield.
"It's now evident that an increasing number of REITs that were originally focused on industrial logistics are now entering the data center sector to achieve expansion in both market scale and profitability," according to Cushman & Wakefield's 2020-2021 Asia REIT Market Report emailed to the media on July 12. Mapletree Industrial Trust, Keppel DC REIT, Mitsui Fudosan Logistics Park Inc. and Cromwell European REIT all acquired data center assets in the last two years, it noted.
Singapore-based Keppel DC REIT, the only REIT in Asia focused on data centers as of 2020-end, was the top performer in its home market with a 38% annualized total return in 2020, the report said.
Data center REITs in other parts of the world also logged strong earnings performance in 2020 thanks to the consistent growth of the data center sector fueled by the rise of e-commerce, the development of internet industries and big data, according to the report.
Even before COVID-19, the demand for data centers was growing rapidly. But with the pandemic, the digitalization trend and the demand for data has exploded, said Vijay Natarajan, an analyst at RHB Singapore. "So, in a way, COVID has structurally changed or increased the demand for data centers," he said, adding that data centers have become an important part of REITs' diversification strategy.
The appeal of data centers to investors is not expected to wane any time soon even after the pandemic is brought under control. "Over the medium- to long-term, a lot of companies are expected to adopt digital trends, which are anticipated to become a part of life. So, I don't expect the demand for data centers will drop significantly, mainly because I expect the digital transformation will continue to accelerate toward 2025," Natarajan said.
Krishna Jyoti Guha, an analyst at Jefferies, said the "global economy is generating, consuming and storing an increasing amount of data. This has been accelerated by the pandemic and underpins the demand."
Overall, the combined effect of COVID-19 containment measures and travel restrictions was the biggest factor for REIT earnings in 2020, the Cushman & Wakefield report said. However, earnings from REITs in the industrial or logistics space demonstrated greater resilience.
With economic recovery in Asia and the expansion of e-commerce demand, warehouse and logistics facilities quickly resumed operations in 2020. Occupancy rates were high and rentals grew moderately, the report said.
Industrial logistics markets in mainland China and Hong Kong, Malaysia and Vietnam showed the highest risk tolerance in the Asian region, according to the report.
Acquisition deals in 2020 were mainly focused on logistics, data center and industrial park properties, the report said. However, retail acquisitions accounted for a smaller share in the investment market, it added.