Malaysia is rapidly becoming a key Asian data centre hub as the country increasingly adopts digital transformation in recent years. By Sachin Goel, Jean Monson, James Teo, Julian Grimme at MUFG Bank
Malaysia’s data centre supply has surged from circa 100MW1 in 2020 3.5 times to c.350MW2 in 2023, with a further 2.7GW in development expected to be quickly absorbed when they come online.
The onset of Covid-19 has contributed greatly to the growing levels of online interactions in daily life, including remote working and consumption of content virtually. Enterprises are also transitioning onto public cloud to enhance operational efficiency. As a result, broadband traffic in Malaysia has surged by 140% from 1.0 exabytes in December 2019 to 2.4 exabytes in December 20233, spurring the demand for improved digital connectivity.
Going forward, the dawn of AI is projected to drive even more demand for connectivity as the internet of things brings more bespoke interactions to end-users. Leveraging on this growth, we have seen strong interest from Big Tech in Malaysia, as the likes of Google, Amazon, Microsoft and Bytedance, et al collectively announced US$23.3bn4 of investments plans there.
* Malaysia benefits from a confluence of sector tailwinds – Multiple factors contribute towards Malaysia’s attractiveness as a data centre node, eg hotspots around Kuala Lumpur, Cyberjaya and Johor offer developers with ample availability of powered land. Encouraged by the government, Tenaga Nasional Berhad has so far agreed to supply more than 2.3GW of power to data centre operators as of FY24, with a roadmap to support the over 5.0GW the sector needs by 2035.
This allows Malaysia to differentiate itself from regional markets, many of which are land and/or power scarce – eg Singapore – and enable Malaysia to establish themselves as the hinterland to absorb the overspill demand despite Singapore’s easing of the data centre moratorium in 2024.
Malaysia enjoys excellent international connectivity to 23 operational subsea cables, with six more being developed. The Singapore-Johor Special Economic Zone could further add to the interconnectivity, and position Malaysia strongly to pull away from Batam, as the primary overflow site within Sijori.
The Malaysian government has provided concerted support to the DC industry in recent years. Apart from facilitating power provision, various schemes have been established including Malaysia Digital, Kulai Fast Lane programme and Data Centre Planning Guidelines to offer incentives, improve ease of conducting business and ensure that projects satisfy baseline technical quality to sustain the industry in the long run. Malaysia’s perceived neutral stance geopolitically has also opened up the market as a potential safe harbour for a diverse set of offtakers seeking to minimise the impact from the ongoing cross border tensions.
* Platforms solve for the dual challenges of faster time to market and larger capacity demands – Given the ongoing digital transformation, more workloads are now migrated onto public cloud and hyperscale cloud service providers are now also seeking to expand their footprint in their established availability zones to cope with expected demand and future proof their business. The advent of AI is also demanding higher power density, and both trends are driving the demand for larger DC campuses to accommodate the anticipated workloads. Shorter time to market is also a growing focus to provide these cloud service providers better flexibility to manage their capacity.
Recognising the growth opportunity, a myriad entrants from international data centre operators, financial sponsor-backed regional and domestic players, large local conglomerates, and startups helmed by industry veterans have announced investments into the market. These data centre investors are increasingly adopting a land-banking strategy for large, gigawatt capable sites, to better meet their customer needs amid the “gold rush”. The ability to raise agile financing to meet these demands is therefore growing in importance, often times requiring innovations in financing structures to strike a balance between business needs and risk, particularly within a greenfield context.
Evolution of Malaysian DC financing
Data centre financing has taken different forms in the Malaysian market depending on local dynamics, offtake, and the pools of liquidity being accessed. The evolution of greenfield DC financing in Malaysia has developed rapidly. In the early days, regional and local lenders adopted corporate recourse and real estate valuation methodologies in the first wave of financing. As campuses and corresponding debt quantums increase in size significantly, the market is at an inflexion point of pivoting to cashflow-based non or limited recourse structures which offers advantages in gearing and a deeper pool of offshore liquidity.
* Local vs international liquidity – As the market scales up significantly because of tailwinds for Malaysia, sponsors have gone in search for deeper pools of liquidity, expanding beyond local liquidity to international bank capital. International data centre operators are increasingly engaging their global relationship banks to support their Malaysian DC developments. With that comes structures that have proven successful in global project finance transactions, with an emphasis on high-quality cashflows and robust long-tenor offtake contracts.
There are a myriad considerations for developers when deciding between local and international structures: including currency, tax, availability of security (and the regulatory considerations associated with the provision of onshore security to offshore lenders). These structuring considerations will have a bearing on the ultimate funding source that sponsors want to access. Most recently, borrowers who have Malaysia Digital Status5 have adopted offshore solutions.
* Diversity of offtake contracts – The question of whether non or limited recourse financing is the optimal option is driven by offtake contracts. There has been an increasing diversity of offtakers in Malaysia driven by geopolitics; from US to Chinese offtakers, rated and unrated. Long tenor high-quality hyperscale offtake contracts lends itself well to a PF credit risk assessment; contracts displaying “infra like” characteristics align well with traditional project finance principles.
On the other hand, a diversity in credit quality of offtakers and/or shorter contract tenors are less well suited for non or limited recourse structures. The creditworthiness of the counterparty and the tenor of the contracts is a starting point to determine how closely aligned the contracts are with cash flow based structures.
Key aspects of the offtake contracts that are scrutinised carefully for non-recourse transactions include pricing, currency, tenor, termination provisions, and the specific requirements that operators must fulfil. The currency of the offtake contract determines hedging requirements (where relevant, should there be an FX mismatch) and consequently is a strong consideration for the tapping of US dollar or Malaysian ringgit liquidity.
* Debt sizing and financing tenor – Debt sizing tenor for PF deals is largely driven by lease tenor but may include potential extensions depending on banks’ appetite for renewal risk. Debt sizing can take different forms but in most transactions a loan-to-cost restriction will apply. As a broad rule of thumb, cashflow-based metrics which speak to repayability of debt vis-a-vis contract cashflows apply in many structures, albeit with varying terminology.
Most international financing structures are designed as mini-perm loans that cover construction and incentivise refinancing through partial amortisation, cash sweeps and/or margin increases once the data centre is completed. Ability to repay any balloon amount outstanding at maturity is critical to the debt-sizing analysis.
* Supporting data centre operator needs with bespoke financing solutions – As customers’ demands are growing in scale – and rapidly – speed to market is of the essence for a data centre operator. Topics such as land banking, early-stage financing, offtaker “whitelist” and expansions are critical for operators to secure market share with key customers. Sponsors are increasingly looking to bespoke financing solutions from their banks.
Portfolio structures are becoming more common due to large-scale campuses demand and markets will need to unlock new sources of liquidity in the region to support the volume of data centre growth in Malaysia. Innovative solutions that involve non-bank liquidity and the capital markets will be crucial for the future development of the data centre industry in Asia.
Sustainability in data centres
Energy is at the heart of data centres. The International Energy Agency estimates that global electricity demand from data centres could double from just under 2%, approximately 1.7%, in 2022 to 4% in 2026; an increase from 460 TWh to close to 1,000 TWh.6 A driver of increased power demand is the explosion of generative artificial intelligence; a typical ChatGPT3 search uses approximately 10x more electricity than a Google search.7
Accompanying Malaysia’s data centre boom is a surge in electricity demand, which is expected to exceed over 5GW by 2035. Tenaga Nasional Berhad has already received applications for supply exceeding 11GW, which represents just over 40% of Peninsular Malaysia's existing installed power generation capacity of about 27GW.8
This is a global issue; governments around the world are trying to balance the growth of data centre hubs against climate goals. Neighbouring Singapore is a good example: since lifting the 2019 moratorium, Singapore has been cautiously allocating new data centre capacity of up to 300MW, coupled with stringent efficiency requirements of power usage effiency (PUE) below 1.3. In May, Singapore released its Green Data Centre Roadmap which encourages the data centre ecosystem to tap energy efficiency solutions and for that growth to be sustainable through expanding low-carbon energy sources.9
Singapore is focused on innovative solutions to make data centres more sustainable, including pioneering a Tropical DC Methodology which raises the data centre operating temperature to achieve further PUE savings. Data centres are also encouraged to adopt liquid cooling technologies to reduce total energy consumption. Given the similarities in climate across Singapore, Malaysia, Indonesia; these South-East Asia countries face a shared unique challenge of cooling high heat density servers amid soaring temperatures and humidity. Singapore hopes its roadmap will be a blueprint for the rest of the growing DC hubs in the region.
As heavy users of power, the data centre sector has traditionally been a driver of clean energy deployment globally. To meet net-zero targets, tech giants are demanding carbon-free energy to power their data centres. The government recognises that to attract data centres they need to accelerate the renewables rollout. In September, Malaysia announced guidelines for Corporate Renewable Energy Supply Scheme (CRESS), to facilitate corporate PPAs and the adoption of green energy by allowing users of green energy such as data centres to purchase electricity through open access.
Regions such as Sarawak are looking to play a pivotal role in South-East Asia’s renewable energy transition by exporting its renewable power (predominantly hydropower) to neighbouring countries through the ASEAN Power Grid. Although in their early stages, these developments are critical to accelerate the decarbonisation of energy sources for data centres.
Another critical resource for data centres is water: a 100MW data centre uses about 1.1m gallons of water per day for cooling; the equivalent of daily water usage for a city of 10,000 people. While air cooling supports racks of up to 20kw, AI workloads require higher rack densities from 20 kW to over 100kW. Liquid cooling technologies such as direct to chip cooling are needed for efficient cooling of racks operating at higher power densities.
Data centres need potable water; water that you and I drink, clean and cook with. Places like Singapore and Johor have grappled with clean water supply shortages, and this will only intensify with data centres in competition with the same water that people are in competition for.
To manage the heavy resource footprint of data centres, Malaysia is working on guidelines to regulate the data centre ecosystem, including power usage efficiency, water usage effectiveness (WUE) and carbon usage effectiveness (CUE). In addition, the government is focused on ensuring the data centres will be bringing “tangible” added value to the country, such as high paying jobs opportunities and knowledge transfer.10
There is a conscious emphasis on growing the entire data centre ecosystem sustainably.
In addition to designing financing solutions, MUFG works closely with our clients to incorporate sustainability in the financing instruments. In Malaysia, AirTrunk is one of the leading data centre operators that has implemented sustainability targets in its financing, incorporating KPIs for power, water, carbon (PUE, WUE, CUE respectively), gender diversity and gender pay gap targets.11 Its JHB1 data centre is one of the most efficient in the country utilising liquid cooling technology and renewable energy.12
In Indonesia, MUFG was a mandated lead arranger for a US$400m sustainability-linked project financed facility for EdgeConneX, the largest sustainability linked data centre loan in Indonesia. This SLL included KPIs for PUE, renewable energy and safety.13
Data centres are a critical part of the infrastructure supporting digitalisation. We are in a golden age of AI and that growth is supercharging data centres. This tremendous growth brings with it huge opportunities and challenges. Supporting the entire ecosystem – from energy, water to job creation – will be critical to Malaysia’s ability to harness and unlock the sustainable growth of data centres.
Footnotes
1 - Source: content.knightfrank.com/research/2643/documents/en/malaysia-data-centre-research-report-2023-10072.pdf
3 - Source: https://mcmc.gov.my/skmmgovmy/media/General/pdf/2Q-2020-C-M.pdf, https://mcmc.gov.my/skmmgovmy/media/General/Resources/C-M-2Q-2024_Eng.pdf Note: 1 exabyte is 1bn gigabyte
4 - Source: Various news articles and press release
5 - https://www.skrine.com/insights/alerts/april-2024/investment-in-data-centres-in-malaysia
6 - This includes data centres, cryptocurrencies and artificial intelligence uses. Data centre usage alone is closer to 1.3% https://www.iea.org/reports/electricity-2024, International Energy Agency Electricity 2024 Report: Analysis and Forecast to 2026, Page 31
7 - https://www.epri.com/research/products/000000003002028905
9 - https://www.imda.gov.sg/how-we-can-help/green-dc-roadmap
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