Asia Pacific (APAC) data center growth will remain strong through 2028, but future capacity expansion is expected to become increasingly concentrated in markets and operators capable of supporting artificial intelligence (AI)-grade workloads, large-scale financing and execution discipline, BMI Country Risk and Industry Research said Monday.

The research house said in a report that Southeast Asian markets such as Malaysia are likely to continue attracting higher-value AI-related deployments, while Indonesia and Thailand are positioned to absorb displaced non-AI and overflow demand as land constraints, market saturation and tighter policy selectivity intensify in primary regional hubs.

According to BMI, APAC’s data center compute capacity is forecast to grow at an average annual rate of 11 percent between 2025 and 2028, expanding from 11GW to 15GW.

Southeast Asia is expected to play an increasingly important role as hyperscalers and cloud operators seek alternatives to mature but constrained markets such as Singapore.

“Massive international investments, especially in Johor, which holds close to 500MW of live capacity, underscore the region’s rise as a critical alternative to supply-constrained hubs like Singapore,” BMI said.

The report also highlighted a growing bifurcation across Southeast Asia’s data center landscape, with Malaysia rapidly consolidating its position as the region’s primary AI-focused infrastructure hub while neighboring markets absorb broader enterprise and cloud-related demand.

Prime Minister Anwar Ibrahim announced earlier this year that Malaysia had stopped approving non-AI related data center proposals since 2024, reflecting the government’s effort to prioritize larger, capital-intensive facilities aligned with its AI ambitions.

BMI said the policy reinforces its long-held view that Malaysia is selectively favoring hyperscale AI projects with stronger financial backing and higher long-term economic value.

“This policy validates our view that Malaysia is prioritizing high-value, capital-intensive projects,” BMI said, adding that barriers to entry in Johor are rising and increasingly favor established operators over smaller developers.

The research house estimates Malaysia’s planned and under-construction data center pipeline at around 4.6GW, with the overwhelming majority linked to AI workloads.

This trend has accelerated consolidation among global operators and private-equity backed infrastructure platforms.

Major players active in Malaysia include Bridge Data Centers, backed by Bain Capital; AirTrunk, owned by Blackstone; Yondr, backed by DigitalBridge; and Princeton Digital Group, which has received investment support from Stonepeak.

Bridge Data Centers alone accounts for roughly 14 percent of Malaysia’s live market capacity despite competing in a fragmented market with more than 40 operators, excluding major cloud service providers, BMI said.

Malaysia’s growth narrative has also evolved beyond simply serving as an overflow market for Singapore.

BMI said local demand is increasingly being driven by government digitalization ambitions, enterprise adoption and large-scale hyperscaler investments from companies such as Microsoft and Google, which have each committed more than $2 billion to Malaysia.

At the same time, environmental and sustainability concerns are becoming more central to policymaking across the region.

Malaysia introduced a comprehensive Data Center Framework effective October 2025, alongside its MyDigital blueprint, which offers tax incentives and special economic zones while also imposing stricter sustainability requirements.

BMI noted that nearly 30 percent of proposed data center projects in Malaysia were reportedly rejected after failing to demonstrate responsible power and water consumption practices.

The country has also implemented minimum utilization policies, including its so-called “85 percent rule”, to improve infrastructure efficiency.

Meanwhile, water scarcity and power availability are increasingly emerging as critical constraints for the industry, particularly for AI-oriented facilities that consume significantly larger amounts of electricity and cooling capacity than conventional cloud infrastructure.

Singapore, while remaining Southeast Asia’s most mature data center market with approximately 1.5GW of operational capacity, is now prioritizing sustainability and energy efficiency over rapid expansion.

BMI said the city-state’s second Data Center Call for Application framework allocates at least 200MW of new capacity exclusively to operators achieving stringent efficiency standards, including Power Usage Effectiveness below 1.25 and at least 50 percent green energy sourcing.

Projects meeting those requirements are eligible for faster approvals and dedicated grid allocations, effectively turning sustainability into a competitive advantage.

The report noted that Singapore’s tighter policy stance continues to redirect excess demand towards neighboring markets such as Johor in Malaysia and Batam in Indonesia.

Indonesia, meanwhile, is emerging as a strong long-term competitor supported by its massive domestic population, expanding digital economy and favorable investment incentives.

BMI said the country currently hosts more than 14 cloud zones operated by global providers and continues to attract significant hyperscaler investments, including Microsoft’s US$1.7 billion commitment announced in 2024.

However, execution capabilities remain a challenge. BMI noted that the gap between announced investments and delivered operational capacity in Indonesia remains relatively wide, raising questions about deployment timelines and infrastructure readiness.

Indonesia is leveraging its Special Economic Zones to attract investment through tax holidays of up to 20 years, value added tax (VAT) exemptions and import duty relief.

Nongsa Digital Park in Batam is being positioned as a flagship digital infrastructure hub with streamlined approvals and legal certainty for foreign investors.

Thailand, conversely, has emerged as arguably Southeast Asia’s most improved data center story over the past two years.

The country has rapidly transitioned from hosting relatively small facilities to developing multi-building hyperscale campuses concentrated around the Eastern Economic Corridor.

BMI said Thailand’s strategy differs from regional peers because it focuses heavily on power access, subsea cable connectivity and renewable energy procurement rather than relying solely on fiscal incentives.

Thailand recently approved a 2GW Direct Power Purchase Agreement pilot program specifically targeting data centers beginning January 2026, allowing operators to procure renewable energy directly from generators.

Combined with incentives from the Thailand Board of Investment — including 100 percent foreign ownership rights, tax breaks and land ownership allowances — the country is positioning itself as a serious regional challenger.

The report highlighted ByteDance as one of Thailand’s largest data center investors, with plans to deploy nearly $4 billion into local projects.

Improved subsea cable connectivity is also expected to strengthen Thailand’s ability to capture spillover demand from Singapore.

Vietnam and the Philippines, on the other hand, remain earlier-stage markets where digital services growth continues to support basic enterprise demand, although meaningful AI-related workloads are still limited.

BMI said these markets are likely to see more advanced AI use-cases materialize closer to 2028-2030 rather than in the immediate term.

Vietnam has nonetheless introduced sweeping reforms, including allowing 100 percent foreign ownership of data centers from July 2024 and streamlining licensing procedures to improve investor attractiveness.

Across Southeast Asia, operator strategies are increasingly adapting to tighter regulations, land scarcity and sustainability requirements, said BMI.

Cross-border diversification, modular construction and regulatory engagement are now central to expansion strategies, it added.

BMI also expects merger and acquisition activity across the region’s digital infrastructure sector to accelerate, supported by lower policy uncertainty and easing interest rates.

Recent deals include Blackstone’s $16 billion acquisition of AirTrunk in 2024 — the largest data center transaction in Asia — and the $6.6 billion takeover of 82 percent of ST Telemedia Global Data Centers by Singtel and KKR in 2026.

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