Jabez Tan on Hong Kong Data Centre Market

February 12, 2019

Hong Kong’s Cloud Data Center Boom

As a network gateway between mainland China and the West, Hong Kong is a magnet for hyperscale cloud platforms from both sides of the gateway.

American cloud providers anxious to grab share of the world’s largest and fastest growing internet market in mainland China and Chinese hyperscale platforms attempt to grow a more meaningful presence outside their homeland are driving a boom in the Hong Kong data center market.

The amount of hyperscale cloud data center capacity in Hong Kong increased 42 percent in the past year, from 43.4MW in 2017 to 61.7MW in 2018, according to Structure Research.

Because of its location just outside mainland China, Chinese companies use Hong Kong data centers as a springboard for international expansion, while international companies serving Chinese customers use Hong Kong as the alternative to building physical infrastructure inside China, which for outsiders is a much more complicated affair.

While new data center construction will satisfy the needs of hyperscalers and other colocation customers in the next several years, a shortage of land in Hong Kong could hinder data center growth four or five years from now, according to Structure, a Toronto research and consulting firm.

In the meantime, five new data centers are expected to come online in Hong Kong between 2019 and 2022, providing an additional 160MW of capacity.

“There is still vacant capacity that existing providers can expand into or build into to satisfy the near-term demand, but at some point in the next four to five years, they will need to find a way to allocate more land for data center development,” Jabez Tan, head of research at Structure and the report’s author, told Data Center Knowledge in an interview.

Hong Kong Market Expected to Double

Structure expects the Hong Kong colocation data center market to double, going from $883 million in revenue in 2018 to $1.7 billion in 2023. This year, the firm estimates, the market will grow 17 percent. The Hong Kong market is expected to grow faster than the global market between now and 2023 – at a compound annual growth rate of 14 percent, Tan said.

Hyperscale cloud platforms like Amazon Web Services, Google Cloud Platform, Microsoft Azure, Alibaba Cloud, and Tencent Cloud are fueling the growth in Hong Kong. But the biggest spenders in the Hong Kong colocation market today are network and IT service providers, who are responsible for 30 percent of total revenue. The hyperscalers are a close second, with 23 percent of the market.

Hyperscalers, however, are the fastest growing vertical in Hong Kong, expected to grow at a compound annual rate of 15 percent in the next five years. IT and network service providers are expected to grow at 12.4 percent, Tan said.

“The hyperscalers are consuming tons of capacity, which is great for the data center companies,” he said.

Unlike Tokyo, Sydney and Singapore, Hong Kong is the only international hub in the Asia Pacific region where hyperscale cloud companies lease 100 percent of their data center capacity instead of building their own data centers, Tan said. The biggest reason for that is the scarcity of appropriate land.

“For it to make sense for Microsoft or Google to build their own site, they would need to purchase large plots of land and get huge economies of scale,” Tan said. “But if they can’t achieve the economies of scale, there’s no reason why they should build if they could just lease it from a colocation provider.”

The Land Issue

Hong Kong has limited land, and the situation is exacerbated by the government auctioning off land that becomes available without prioritizing one industry over another, Tan said. In contrast, in Singapore (which enjoys a data center hub status comparable to Hong Kong’s), if companies want land to build data centers, they present viable business cases, and the government allocates the land, he said.

Land and real estate developers in Hong Kong who own industrial land could help alleviate the land shortage issue. In recent years, they’ve begun to lease land to data center operators, so they can build colocation facilities, Tan said.

“Land and real estate developers own a lot of industrial land for logistics, warehousing and all sorts of traditional industrial functions,” he said. “These developers see the data center business growing faster and want to be able to tap into that segment.”

These land developers could potentially shake up the Hong Kong data center market in the future by striking deals directly with hyperscalers, providing them the large plots of land they need to build their own data centers. “Hyperscalers could potentially alter the dynamic,” Tan said.

In the meantime, NTT Communications, SUNeVision, and Equinix are the top three colocation providers in Hong Kong, with a combined market share of 55 percent.

Wholesale Revenue Expected to Outgrow Retail Colo

Retail colocation revenue currently makes up 51 percent of the market, while the rest is generated by wholesale data center providers, who predominantly lease to hyperscale platforms. Because of the hyperscale demand, it will become a 50/50 split in 2020, and by 2024, wholesale revenue will total 54 percent of the market, Tan said.

Colocation providers make higher margins with retail customers, but hyperscale companies are shrewd at negotiating favorable prices, because they know everybody wants them as customers, he said.

“Alibaba, Tencent, Microsoft, Google, and AWS are the five companies that are expanding and growing at a fast pace. The wholesale operators are chasing these five customers, and because of that, they can negotiate lower pricing not just in Hong Kong, but globally,” he said.

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