Why Keppel DC REIT runs its data centres like shopping malls: CEO

Keppel DC REIT operates its data centers like shopping malls, according to its CEO. While data centers are often seen as mere rows of servers housed in windowless buildings, they are actually more complex. The REIT must offer more than just real estate space and sustainable energy solutions to attract customers, as data centers are already providing these basics.

As the global AI boom drives tech stocks up, data center REITs face tougher investor questions about their yields and risk-adjusted returns. For Keppel DC REIT, the solution is to strategize the right mix of tenants for sustainable growth, CEO Loh Hwee Long explained. They lease around 30% of their assets on long-term contracts with hyperscalers – the tech giants that run large-scale cloud networks.

This is usually for 15 years at a minimum, but it may not be the most profitable. The rest of the tenants are on shorter leases for their own server hardware, a practice known as colocation.

Loh likens this hybrid model of long-term hyperscaler contracts and colocation to the anchor tenant model of a shopping mall. The long-term contracts are like anchor stores like supermarkets or department stores – they offer lower rates but lower growth potential. Smaller pop-up stores in malls are rented by larger customers like financial institutions and government bodies. This unique mix allows Keppel DC REIT to drive more organic growth than just relying on hyperscalers.

Hyperscalers currently make up half of Keppel DC REIT's top 10 clients, with one unnamed hyperscaler contributing 43.5% of the portfolio's total rental income of $210.4 million. It also has larger non-hyperscaler tenants contributing about 15%. This strategy is suited to the primary markets Keppel DC REIT operates in, which are Singapore, Japan, and South Korea. They are mature markets with deep fiber connectivity and hyperscaler clusters, but high barriers to entry due to land and power supply constraints.

Keppel DC REIT sees great potential in these Tier 1 markets, where they can act as a price-setter for higher rents. They can also build a new data center in Japan, which could take 5-7 years due to nuclear power suspension and construction sector challenges. However, markets with abundant data-center capacity could see hyperscalers securing more favorable lease terms due to their bargaining power.

While Malaysia's regional prominence is growing, it is not a current priority for Keppel DC REIT as the data centers there handle different workloads. Hyperscalers are more likely to house sensitive, business-critical workloads in Singapore, where clients are willing to pay a premium for reliability and peace of mind. Keppel DC REIT will keep an eye out for investment opportunities in Malaysia, provided they are appropriately priced.