Emerging sub-markets in Malaysia’s data center industry will face risks, BMI Industry Research said in its recent note.

The research house has revised its estimates and forecasts but Johor continues to be the leader in Malaysia in terms of upcoming information technology (IT) load, with 268.5 megawatt (MW) of live capacity.

According to BMI, there are approximately 507MW of capacity under construction, and another 921MW planned for deliver over the long term.

It noted the imposition of a sustainability-linked regulatory framework could catalyze further developments in regions outside of Cyberjaya and Johor, including Kedah, with investment looking to capture new regions to become a digital hub.

As an equity investor, it said this creates a dynamic where these developments become a portfolio bet on which market is likely to experience demand spillover from major markets or become a new hub.

Consequently, this requires a higher risk tolerance, in an effort to position the capital to crystalize on the demand, even in the instances where the demand may materialize elsewhere.

“While uncertainty rises in these areas, expected returns are, as a result, elevated,

“Ultimately, depending on the portfolio strategy, this could result in outsized returns, compared to the most saturated markets,” said BMI.

According to BMI, this development aligns with its prior conviction that sustainability-linked standards would distort competitive dynamics, followed with flows away from the primary Malaysian markets.

It noted Kedah shares key characteristics of the major markets in Malaysia, before these were saturated with activity, such that this looks to be a region of interest for investors.

It opined that Kedah’s strategic location enables it to capitalize on the submarine cables that run in Southern Thailand, with data centers potentially utilizing this connectivity source.

However, it noted one key environmental risk relates to flooding, of which Malaysia is prone towards, posing a threat to the timeliness and cost implications of projects within the region.

It is noteworthy that flooding is a large risk in many parts of Malaysia, however, investors may be enticed by the lack of structural constraints posed in the most saturated markets.

Business tendency surveys in the information and communications technology sector indicate rising satisfaction with past performance and optimism regarding key economic variables for business performance in the next three to six months.

With the trend line signaling increasing satisfaction and optimism, business confidence has returned to pre-pandemic levels within the region.

While expectations on future macroeconomic variables are baked into these responses, it is noteworthy that the establishment of local secondary markets could be an indication of these expectations, feeding into investor confidence within the region, said BMI.

It is noted Area Group, a real estate private equity firm, has begun constructing a data center campus in Kedah, northern Malaysia, with the 156-acre campus being valued at $15 billion.

Investment into this area comes amidst above market average power, water and connectivity infrastructure presence, hedging against the potential introduction of regulation aimed at enforcing sustainability-linked standards for the domestic data center industry.

These are likely to be contributing factors to the movement of investment away from saturated domestic sub-markets such as Johor.

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