Malaysia is poised to become the largest data center hub in the region with about 4GW of inventories projected to come on stream over the next four to five years, RHB Research said Wednesday.

The research house said in a note that approximately 2GWs of inventories are under construction and committed for Malaysia, largely in the State of Johor (Southern state of the country).

It is noted that close to 3GW is in developmental stages, and will be added progressively over the next three to five years.

“Potential data center inventory by 2028 would be 10 times more than what it took the industry to build over the last two decades,

“This would put Malaysia ahead of Singapore, Asia’s largest data center metro where capacity is projected to stabilize at 1.4GW due to land scarcity and stricter conditions imposed on new builds,” it said.

According to RHB, the Malaysian data center market is expected to account for over 50 percent of the total information technology (IT) load across the top-five South-East Asian markets with data centers in Johor making up the bulk of inventories at over 2.3GW (56 percent of IT load in the country) from about 240MW live supply currently.

The research house continues to see data center-related news flow shaping market sentiment on the back of structural demand, the lower interest rate environment and multi-year investments by hyperscalers.

It said approvals for data center investments are expected to hit another high in 2024, ahead of the guidelines to be enacted on new builds with the investment pipeline looking strong going into 2025.

It sees the value of approved investments for information and communication technology (ICT)-related investments in Malaysia reaching another high in 2024, trumping the MYR 325.9 million ($78.2 million) in value recorded in 2023, supported by the landmark announcements by Microsoft, Google and Amazon Web Services (AWS) to establish their new cloud regions in Malaysia.

According to RHB, Malaysia’s data center landscape has gotten a big shot in the arm with hyperscalers committed to setting up their cloud regions.

It noted the multibillion MYR in investments acts as a strong funnel for growth, adding to the investments by wholesale co-location providers.

“We see the strong commercial proposition of data centers spawning more mergers and acquisitions (M&As) and/or strategic partnerships across multiple stakeholders, fueling an expansion in transaction multiples,” it said.

It added agricultural land owners are warming to diversification opportunities in light of declining yields from traditional crops.

RHB sees the development of cloud regions as strengthening the merits of Malaysia as an emerging data center hub in the region.

With cloud regions, it said hyperscalers can improve on data latency by moving closer to their customers with improved service redundancies.

Enterprises will also be more receptive to a localized “data host” in meeting data residency requirements, and at the same time, pre-empt cyber security threats.

According to RHB, the staggering amount to be invested by the top three hyperscalers of about $30 billion would have a multiplying effect on the economy over time from the creation of new higher value jobs, specifically in the fields of AI, data analytics and data scientists.

RHB also sees accelerated adoption of artificial intelligence (AI) catalyzing demand for scalable data center infrastructure.

It noted more complex AI models will translate into exponential growth in data center workloads with greater investments in graphics processing units (GPUs) to handle and process the enormous datasets to train AI models.

“The prolific cycle of investments should downplay growing concerns over an inventory oversupply, in our view,

“The risks of a supply glut should also be mitigated by data compliance and residency requirements, modular expansion undertaken by data center owners and the need for older facilities to be retrofitted to meet current needs,” it said.

Thus, it opined that the concerns over a potential oversupply of inventories in the medium to longer term are exaggerated.

Cited 2022 study by Oxford Economics (OE), RHB said that over 20,000 jobs were created in Europe by Google’s investments in data centers.

It noted more than 60 percent of jobs relate to capital investments and are staggered across sectors.

“We see data center investments as a catalytic enabler to raise Malaysia’s economic complexity and move up the technology ladder,

“The timely development of the Johor-Singapore Special Economic Zone (JS-SEZ) is a potent stimulus, providing a fecund ground for data centers to thrive,” it said.

It, however, said the strain on power grids and water are well documented data center risk factors on top of regulatory-typed pitfalls with new guidelines on sustainable data center development addressing longer term concerns on the usage of valuable resources.

Overall, RHB sees the ASEAN region continues to benefit as a neutral ground for infrastructure investments from the United States, European and Chinese investors seeking to mitigate geo-political risks, with the US Federal Funds Rate (FFR) cut cycle compounding the positive spillover sentiment.

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