[Edaily Marketin, Reporter KIM SUNG-SOO ] As the formula for data center location has changed, so too have investment criteria. Whereas accessibility to Seoul and telecommunications infrastructure were once key factors, “whether electricity can be secured” and “whether tenants can be secured” have now emerged as the variables that determine a project’s success or failure. “Power and tenants” have become the most important criteria when selecting investment targets.

Metropolitan Area Power Grid Saturated… High Bar for “Securing Power”

According to the financial investment industry on the 20th

,

the key criteria for investment decisions regarding domestic data centers are: △how reliably

power

can be secured, and △how long high-quality tenants can be retained.

This is because these two factors serve as key criteria for assessing the “quality of cash flow” generated by data centers and the “potential for future exit (capital recovery).”

First, as the power grid in the Seoul metropolitan area reaches saturation, there are cases where data centers are unable to secure power even after obtaining permits. As of March of this year, more than half (279 cases) of the applications for technical reviews of power system impact assessments for data centers in the Seoul metropolitan area (522 cases) were deemed “unable to supply.”

The “unable to supply” rate, based on the number of applications, reached 53.4%. The “Technical Review for Power System Impact Assessment of Data Centers” is a system that determines the feasibility of electricity supply by conducting a preliminary quantitative and qualitative assessment of the impact on the power grid from data centers and other facilities expected to consume 10 MW or more of power.

Passing this review means that a project has cleared a rigorous preliminary verification process to ensure a stable supply of large-scale power (10 MW or more). However, in power-saturated regions such as the Seoul Metropolitan Area, the criteria for passing the technical review have been tightened, and the pass rate has dropped significantly.

Consequently, data center developers are turning their attention to “regions with available power.” This is because securing a stable power supply has become just as important as securing land for the data center.

In particular, rather than the traditional distinction between the Seoul metropolitan area and the provinces, new site selection criteria are centered on “how close the data center is to the power grid” and “whether actual power reception (receiving the necessary electricity from external power grids such as Korea Electric Power Corporation) is possible.”

Cash Flow Is Key to Investment… Long-Term Lease Agreements Are Crucial

Furthermore

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from the perspective of financial institutions, “who the tenant using the data center is” is also a key factor. This is because, no matter how scarce data centers become, it is ultimately the tenant who generates actual cash flow.

Given the high initial investment costs associated with large-scale data center development, securing stable tenants as early as possible can determine the feasibility of project financing (PF) and the potential for recouping investment funds.

In particular, global data center-focused capital firms and real estate investment trusts (REITs) cite “long-term lease agreements” and “stable cash flow” as key conditions when incorporating data center assets into their portfolios for the long term. Understanding these criteria is essential if one plans to sell a data center in the future.

“Global data center-focused capital” refers to investors whose objective is to permanently incorporate data centers into their portfolios. Examples include “Keppel DC REIT,” Asia’s first pure-play data center REIT listed on the Singapore Exchange, and “Equinix,” the world’s largest data center-focused REIT.

Macquarie Infrastructure, South Korea’s largest listed infrastructure fund, as well as global private equity firms such as KKR and Blackstone, tend to place a high value on assets that have the potential to improve net operating income (NOI) through lease restructuring.

In other words, even for data centers of the same size, investment value can vary depending on the tenant, the remaining lease term, and how rent increases are structured.

Recently, there have been cases where global CSPs (cloud service providers) are committing to long-term leases. When global operators sign contracts for 10 MW or more, they typically secure long-term leases of at least 10 years. Furthermore, it is becoming common practice for contracts with end-users to include rent increase clauses of 3% per year or linked to the Consumer Price Index (CPI).