[Herald Interview] Why data centers matter to foreign investors

Actis Partner Brian Chinappi (Actis)

After recent success in the market for Seoul office space, London-based investment firm Actis is looking to further invest in Seoul area real estate, this time with a focus on industrial assets.

The company is among those looking to invest in data centers in South Korea, as demand spikes.

As server requirements expand beyond what companies can accommodate in their main offices, firms are looking to relocate their servers to the cloud or a third-party facility.

Both options require data centers, and Actis believes the demand is not being met.

“There will eventually come a time when there would be enough, and (Seoul metropolitan area is) not near that level yet,” Actis Partner Brian Chinappy told The Korea Herald in a recent telephone interview, adding that demand is growing much faster than supply.

Actis’ approach to South Korean market involves building or developing assets that can generate a stable income stream. In the latest deal, Actis forged partnership with GS Engineering & Construction, a South Korean builder, to build and operate a 21-megawatt internet data center in Anyang, Gyeonggi Province, with a total development cost of $315 million.

The company saw this approach as preferable to acquisitions of existing data centers.

“It will remain to be seen whether the incumbent owners of data centers will sell. That’s not our strategy,” said Chinappi, who oversees real estate investment of Actis across Asia-Pacific. “We are looking to build and provide investment opportunities ultimately.”

Cost-competitiveness in data center development involves not only finding an affordable site with sufficient power supply and regulatory compliance but also the ability to win local approval.

Particularly in urban areas, developers of industrial sites can face opposition from local residents.

Although data centers are not noisy, plans to build them can still be derailed by opposition from the local community. A high-profile example was Naver’s withdrawal of a plan to build its second data center in Yongin, Gyeonggi Province, in 2019. Naver relented, and eventually managed to secure a new site in Sejong City the same year.

“Being cognizant of the neighboring uses and dealing with concerns those uses may have is important to the development process in Korea,” Chinappi said.

Identifying demand

Data centers are just one way Actis looks to fulfill market demands that are not being catered for.

Since its 2018 acquisition of Standard Chartered Bank’s Principal Finance Real Estate operation across Asia, including the assets under its ownership, Actis focused on addressing unidentified demand in the market that its assets could satisfy.

One of those assets, Young City, was an office development in Mullae-dong, which is in Seoul, but not in a central enough location to attract major firms’ headquarters.

So Actis focused on the demand for back office space that was cost competitive and did not require the high-profile location that a company’s flagship location might.

“Across major cities in Asia, there is too much focus on grade-A and too little of the focus of finding out what does the demand really need and what can it afford,” Chinappi said.

“The whole thesis behind Young City was to create purpose-built stock that we could fill in and respond to the demand at the right price point,” he also said, adding he was looking for similar opportunities to address the demand for back office space.

In the end, Actis sold Young City in May for $447.4 million, at over three times what Standard Chartered bought it for in 2017.

The same principles underlie Actis’ data center investment, in which it is seeking to address a shortage of supply in Seoul and the metropolitan area.

Local team support

As a foreign investor, Actis has been able to stay active in Korea despite the coronavirus travel restrictions thanks to its team on the ground in Seoul, said Chinappi.

The Korean team enables Actis to carry out onsite due diligence of assets here and explore partnership with Korean firms.

The latest data center deal builds on the partnership with GS Group.

Before the data center deal with GS E&C, Actis partnered with the builder’s sister company GS Retail to jointly refurbish a site to turn it into the Anyoung Insadong cultural complex in central Seoul.

“If you have the experience and you know what works in the local market, and you have the people on the ground that can manage those risks, you can get rewarded well for having taken that risk,” Chinappi said.

Actis manages some $10 billion worth of assets ranging from real estate, infrastructure and private equity. It has invested in over 50 countries in Africa, Asia and Latin America.

By Son Ji-hyoung (consnow@heraldcorp.com)