Digital Core-REIT eyes Asia-Pacific for growth

SINGAPORE: Digital Core-REIT, a data centre real estate investment trust (REIT) listed on the Singapore Exchange (SGX), has laid the groundwork for its expansion into the Asia-Pacific region.

The plans do not include Singapore at the moment, but the REIT’s chief executive John Stewart told The Straits Times in a recent interview that the republic is on his radar when the investment and financial conditions for data centres become more favourable here.

Digital Core-REIT, which has a presence in five tech hubs in the United States, Canada and Germany, was the largest initial public offering (IPO) here in 2021, raising around US$600mil in its listing on the SGX Mainboard.

The REIT unnerved investors in 2023 when it announced in June that its second-largest tenant, Cyxtera, had filed for bankruptcy in the United States. This came after SunGard, its fifth-largest tenant, went bankrupt in 2022.

In a business update in October 2023, the REIT manager said distributable income for the nine months ended Sept 30 fell 8.5% from the same period a year ago to US$31.5mil.

Though the result was below forecast, the REIT manager said it was “entirely due to the higher interest rate environment”.

The uncertainty surrounding Cxytera’s bankruptcy was resolved in November after investment-management firm Brookfield agreed to acquire a substantial portion of Cyxtera’s portfolio, which includes some of the data centres held by Digital Core-REIT.

Now, the REIT is venturing beyond North America and Europe and is turning its sights to the Asia-Pacific. In November 2023, it marked its foray into the region by acquiring a 10% interest in a freehold data-centre facility in Osaka for 7.7 billion yen.

Stewart sees “tremendous opportunity” in the region’s data-centre industry, which he said has not developed as quickly as North America’s.

Japan was selected as Digital Core-REIT’s launchpad into the Asia-Pacific as it is a connectivity hub for Internet traffic to and from North America, due to its position as an initial entry point for submarine cables connecting the Americas to the region, he said.

The transaction will be funded with yen-denominated debt at a fixed interest rate of 1.3% for three years.

“Interest rates in Japan are low. We are able to buy the asset at a 5% yield. And the cost of debt is 1.3%. Five minus 1.3 is a nice, healthy spread,” said Stewart, adding that he is able to invest accretively in Japan.

An investment is accretive if it increases the REIT’s distribution per unit, an important metric for investors because it represents how much more cash they will get from the REIT pro forma, meaning after the acquisition.

DBS equity research analyst Dale Lai said the Asia-Pacific region is one of the fastest-growing markets for eCommerce and the Internet of Things, which drive demand for more data-centre space.

He noted that demand for data centres only started picking up in Asia-Pacific in the last five to 10 years, unlike the more mature North American market, where data centres have been around for close to 40 years.

The growth and adoption of artificial intelligence (AI) is expected to give a further push to the sector, he added.

Similarly, Stewart said AI is the “new tailwind that is building on the heels of the existing demand”.

“There is a tremendous runway for growth which is really just taking off,” he added.

After the Osaka investment, Lai sees plenty of opportunities for Digital Core-REIT to grow its footprint further.

“This opens up the doors for acquisitions in Japan and potentially into other Asia-Pacific markets including Singapore, Hong Kong and Australia,” he said. — The Straits Times/ANN