Japan Special Report: Investing in Data Centers

With Japanese interest rates expected to rise, data centers are likely to become increasingly attractive investments. In addition to the higher yields they offer compared to major asset types, data centers offer greater scope for revenue growth.

Although there are numerous plans for the development of new data centers in Greater Tokyo and Greater Osaka, it is becoming increasingly difficult to secure both land for development and high-voltage power sources in these areas. For these reasons, new development plans are afoot in regional areas such as Hokkaido and Kyushu.

The supply-demand balance for data centers in Greater Tokyo is tight. While new supply for the next three years is set to exceed that of the previous three, any loosening in the balance this may create will only be temporary. As strong demand means that operators should be able to pass on rising power and construction costs to end users, data center usage costs should continue to gradually increase.

Being largely unaffected by economic fluctuations, data centers offer investors stable long-term cashflow. Challenges facing data centers include the length of time required before stable revenue is achieved; the high levels of capital expenditure required; the problem of risk control; and the difficulties inherent in securing a new tenant if the existing tenant were to leave the premise.

There are three major approaches that can be adopted when investing in data centers: direct investment, joint investment, and M&A. Direct investment further splits into different types with different risk-return profile depending on the scope of investment. Joint investment and M&A have also become increasingly popular in recent years for the benefits they provide in terms of allowing investors and data center operators to take advantage of their partners' strengths, and for the speed at which they allow new parties to enter the sector.