Earlier this year, a US$2.8 billion syndicated loan for Bridge Data Centres’ expansion in Malaysia included three local banks and more than 20 regional and global banks.
Inevitably, the financing of data centres by bank debt and the private markets would eventually need some form of assistance from the public markets, possibly in the form of exits and IPOs, observers suggest.
For instance, EY points out that the current US administration’s plan to attract as much as US$500 billion in artificial intelligence (AI) investment over the next four years will require data centres to be constructed. Central to the plan are joint ventures between technology firms, called The Stargate Project, which has already begun constructing data centre facilities in Texas.
In a March report titled Why there is no silver bullet for data centre financing, EY says: “Capital requirements for a single data centre today can run in the billions. This is sparking interest in deals as developers seek to exit existing investments to fund new ones or raise capital in other ways. Even the largest and most cash-rich hyperscalers are seeking alternative financing structures due to costs. While there are multiple financing options available — including both private and public capital solutions — they all have different benefits and downsides. There is no “silver bullet” that works well for everyone. Many data centre developers and operators have been taken private in recent years. However, there is growing awareness that public markets will need to be involved in funding future development, especially in concert with sovereign funds or infrastructure funds, to meet capital needs and spread risks.”
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A rough estimate is that every 1MW of data centre capacity costs approximately US$10 million to construct. However, prices vary based on location, fit-out, the type of data centre, and the availability of power and water. Singapore is a high-cost market, and market watchers indicate that costs have risen, with the construction of a 1MW data centre costing as high as US$13.8 million last year.
The modus operandi of data centre owner-operators, such as Keppel, Digital Realty and NTT, is to develop data centres. When stabilised, these facilities can be divested into a REIT or income fund, freeing up capital to develop newer, more efficient and advanced data centres. Both Digital Realty and Keppel have divested stabilised data centres to their S-REITs.
Already, the Singapore Exchange (SGX) has benefitted from the need for public markets to finance stabilised data centres. SGX is home to two data centre REITs, Digital Core REIT and NTT DC REIT, sponsored by (respectively) the second- and third-largest owner-operators of data centres globally, Digital Realty and NTT. The only other data centre REIT in Apac, DigiCo Infrastructure REIT, was listed on the ASX in December last year.
See also: Data centre value chain comprises more than just REITs
The largest data centre owner-operator, Equinix, owns and operates five data centres in Singapore — SG1, SG2, SG3, SG4 and SG5. SG5 costs an initial US$144 million for construction and an additional US$86 million to expand capacity. SG5 has a capacity of just 8MW.
Financing and valuation
Whichever way data centre financing is structured, as an asset-backed security, single-asset single-borrower or SASB loan, or other forms of securitisation, the value of a data centre is likely to be based on either capital expenditure, future cash flows or cash flows when stabilised. However, unlike other types of property, data centre infrastructure has a shelf life. Data centre infrastructure makes up the largest part of a data centre’s value, and the financing structure and valuation of the data centre are impacted by its shelf life.
Digital infrastructure in the data centre comprises approximately 70% of total data centre capital costs, depending on the land value. In emerging markets, land costs could be lower, accounting for 10% to 30% of the total cost of a data centre. The value of a data centre also includes qualitative issues such as the availability of power and water, and the connectivity of the data centre. A reason why hyperscalers and financial institutions want their data centres in Singapore despite the higher cost is because of Singapore’s hub status, its efficiency, lower operating costs, and its status as the landing point for 26 subsea cables.
The risk of the digital infrastructure within the data centre becoming technologically obsolete is both substantially higher and less predictable relative to other types of properties. This uncertainty means financing structures need to account for future upgrades, the need for continual investment in technology, and future supply disruptions, market observers point out.
“Data centres may be more exposed to technological obsolescence over their useful life than other infrastructure assets,” Fitch says. “This is an asymmetric risk factor where greater exposure to the evolution in tenant demand or lease renewal risk over time may affect Fitch’s rating-case cash flow stresses and the useful life of the asset,” says Fitch Ratings.
Data centres have finite lives before additional capex kicks in as the infrastructure is depreciated. Asset depreciation is also more difficult to model. Additionally, build-to-suit data centres for specific users can complicate exits.
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For instance, Digital Core REIT (DC REIT) plans to redevelop a data centre that was purpose-built for a customer 20 years ago. The customer’s lease for 8217 Linton Hall in Virginia expired on June 30, and the customer moved out at expiration. Although the physical plant is robust and well-maintained, the facility is 20 years old, and the existing electrical equipment needs to be replaced.
During a results briefing in July, John Stewart, CEO of DC REIT’s manager, says: “We have taken the property out of service and are embarking on a comprehensive refurbishment program to enable us to capture the current market opportunity. We expect this process to take approximately 12–15 months, and we expect to place the property back in service in the second half of next year.”
As an example of the cost of infrastructure compared to land cost, Keppel DC REIT acquired KDC SGP 7 and KDC SGP 8 in December for an initial amount of $1.03 billion. The upfront land premium for the initial 15 years is $17.8 million.
Keppel DC REIT plans to exercise a call option in 2H2025 to extend the land tenure for a further 10 years to 2050 for an additional $350 million. The JTC Land Premium is estimated to be approximately $9.9 million in relation to the land tenure Lease Extension, with stamp duty estimated at $1.2 million and $3.5 million of additional costs imposed by JTC for the repainting and upgrade of the building facades KDC SGP 7 and KDC SGP 8. These amounts give investors an inkling of the cost of a data centre’s infrastructure costs.
Elsewhere, Keppel DC REIT divested a data centre in Cardiff, UK, because the power to upsize the capacity was not available, pointing to the importance of the availability of power.
Financing structures match lifecycle of data centres
Experts from Fitch Ratings point out that financing structures are tailored to match the lifecycle of data centre projects. In a recent webinar, Sajaj Kishore, managing director, head of Apac infrastructure and project finance, Fitch Ratings, says: “We are comfortable within the infrastructure space to apply a life of 25 years for certain types of data centre facilities. It’s critical that the data centres we are assessing for 25 years in economic life will benefit from low-latency attributes. The demand supply considerations need to be favourable and facilities need to be modern, efficient and be able to have the ability to retrofit for future technological changes.”
Long-term hyperscale leases (usually for a term of 10–15 years) with creditworthy tenants support higher leverage of up to 8–10 times ebitda due to their stable and predictable cash flows. In contrast, greenfield developments generally require a 65%–75% debt and 25%–35% equity mix, with leverage assessed more conservatively, often around 65%–70% LTV or 6–7 times ebitda once the data centre is operational and stabilised, analysts suggest.
Fitch’s revenue risk assessment focuses on the nature and length of lease and tenant contracts, type and location of the facility and exposure to competition to assess a project’s ability to generate stable cash flow over its useful life.
“For data centres, the fundamental exposure to demand and re-contracting risk is a key consideration. The exposure to cost risk, including the extent of cost pass-through to end tenants and the likelihood and scale of maintenance and capital expenditure, is analysed to determine the overall operation risk,” Fitch adds.
Reliant mainly on debt for the initial phase
Up to 80% of data centre development funding is reliant on debt, according to JLL. This includes debt funds. And, given rising investor demand, the traditional pool of project-finance lenders is being selective about the projects they finance and the terms they offer.
Real estate debt funds are an alternative lender pool to bank loans. In the US, SASB loans tied to the performance of a specific property are popular. Other forms, such as the Direct Debt Master Trust (DDMT) structure, under which asset-backed securities or ABS are issued, and Credit Tenant Lease financing agreements or CTLs, are on the rise in the US as well.
Data centre tenants are among the biggest investment-grade companies in the world, making them perfect for CTLs, which typically involve long-term leases with a stable tenant that allows for higher loan-to-value ratios, notes Clifford Chance.
According to Dentons in a July 23 report, lenders are also demanding that sponsors commit a defined portion of equity upfront (typically 25%–35% of the capital stack for greenfield projects).
“Lenders are also increasingly insisting on step-in rights, allowing them to take control of the project if the borrower defaults or fails to meet key obligations,” Denton says.
For Fitch, data centre financing is structured such that the cash flow generated by the data centre or the data centre portfolio is ringfenced into a special-purpose vehicle and benefits from project finance creditor protection features to ensure cash is applied to debt service. This includes controls on distributions featuring lock-up covenants, limitations on additional indebtedness and M&A activity, and security over the assets.
Where does the stock market come in? When the cash flow of the data centres is predictable, or when the data centres have managed to line up long-term leases, the owner-operators can divest them into a listed fund or REIT.
In this geography, the data centre building boom has centred on Johor, where, according to DC Byte, the data centre capacity has gone from just 10MW to 1.5 gigawatts of new capacity under construction. Market observers are concerned that banks may step back from lending to newbuilds. Whether these entities seek additional equity and are eventually listed on Bursa Malaysia or SGX remains to be seen.
