The world of project finance in the Asia-Pacific region over the last several years has been focused on helping the region clean up its energy mix and transition to cleaner forms of energy – ranging from offshore wind projects to battery energy storage systems – but now, banks are shifting their attention to other pressing needs, such as the demand for digital infrastructure, and primarily with the construction of data centres.

With the growing use of artificial intelligence (AI) applications and cloud computing, there has been a rapid demand for new facilities to support the technology’s expanding data processing and storage requirements. Moreover, concerns around data sovereignty in locations like the United States have prompted some Asian countries, such as India, Malaysia and Thailand, to construct local data centres.

The Asia-Pacific data centre market is ripe for investment as, according to Renub Research, the market is predicted to reach US$53.58 billion in 2028 and expand at a compound annual growth rate of 12% from 2023 to 2028.

“Investor demand for data centres is strong, with a wide range of buyers seeking stabilized assets,” states a CBRE Research commentary, “However, there remains a lack of stock for sales.”

Green focus

While various factors, such as the availability of suitable land space, are key to growing the data centre segment in a particular jurisdiction, a more critical component is having a sufficient energy supply, particularly clean energy to support the growing computing demand. Data centres account for 1% to 1.5% of global electricity use, the International Energy Agency estimates, contributing to nearly 1% of energy-related greenhouse gas emissions. 

Looking to address this issue, many of the new data centre project financings in Asia are now being structured with environmental, social and governance considerations in mind. For example, last year Digital Edge was able to close its US$335 million green loan for the first phase of development of the company’s 100-megawatt data centre project in South Korea.

In Indonesia, EdgeConnex did the first-ever sustainability-linked loan for a data centre in the country, with margin adjustments on meeting key performance indicators related to power usage effectiveness, renewable energy use and safety goal achievement.

Similarly, in Hong Kong, Asia-Pacific real estate firm ESR was able to secure a HK$1.6 billion (US$205 million) sustainability-linked loan to fund the conversion of a cold storage facility into a data centre, with interest reduction incentives linked to the project’s sustainability targets.

The emergence of green-focused data centres is a good sign for several jurisdictions interested in having more digital infrastructure while not having their commitments to climate change mitigation be impacted. Singapore, for example, last year ended a three-year pause on new data centre projects in the city-state, while emphasizing the need for newer facilities to have higher green standards.

Mitigating risks

Though banks’ appetite for taking part in data centre project financings is growing, there needs to be a balanced and prudent approach when underwriting such projects. This involves closely examining the data centre’s offtaker contract to discover whether it is servicing an established organization, such as Microsoft or Tencent, or a lesser-known new economy company without a solid track record, as banks would normally not finance any speculative builds.

“The track record of the sponsor alone is not enough for us to finance as we also look at the direct agreement sponsors sign with offtakers,” explains a banker familiar with data centre financings. “We look at the party, the tenor and, most importantly, the termination rights of the parties and what penalties they have to pay if they terminate for convenience.”

With demand for data centre development not expected to drop off anytime soon, banks will need to consider how they can cope with possible client concentration risk and, in the next stage of development, use the capital markets to help take data centre debt off their lending books.