Data Centers in Australia: A Growth Market Segment for Post-COVID Recovery

Fueled by the emergence of remote working, online schooling and virtual entertainment during the COVID-19 pandemic, and compounded by the growing impact of Big Data and the Internet of Things, Australian data center providers are experiencing significant increases in demand for their storage and processing capabilities. As such, data centers present a prime opportunity for economic recovery following the effects of the COVID-19 pandemic in Australia.

This potential for economic recovery has been identified by the New South Wales state government, which has enacted changes to the planning framework for data centers. These changes aim to encourage investment in this emerging asset class, with the aim that this will, in turn, boost the local economy. The importance of data has been recognized by the Governor of the Reserve Bank of Australia, Phillip Lowe, who also identified data as “the new oil of the 21^st century” and who stressed that investing in data and in Australia’s digital capability are critical steps to Australia’s future prosperity.¹

Recent market activity

Currently home to the majority of Australia’s data centers, Sydney is classified as a tier 1 data center market in Asia Pacific alongside Tokyo, Hong Kong SAR, and Singapore. Sydney’s rich telecommunications connectivity (including an array of submarine communication cables which connect directly to Asia and the US) means the city is an attractive location for data center acquisition and development.

Sydney is therefore an ideal market for Australian data centers, a fact reflected in significant increases in land prices in greenfield areas on Sydney’s fringe. Colliers, for example, has noted that approximately AUD8 billion of industrial and logistics assets were transacted in H1 2021, compared to AUD5.5 billion worth of transactions that were completed in the whole of 2020.²

Demand for entry into the data center asset class has increased significantly in the last few years. While a proportion of these transactions have occurred at the equity level, the DLA Piper Sydney real estate team has seen an increased demand for transactions occurring at the land level.

For example, in 2021, DLA Piper acted for Asia Pacific hyperscale data center company AirTrunk on the acquisition of a 9 hectare site in Western Sydney. This site, known as SYD3, will be developed into a hyperscale data center with more than 320 MW of capacity, making it the largest single campus in the Asia Pacific region (excluding China).³  SYD3 will join AirTrunk’s existing SYD1 facility (with more than 130 MW of capacity) also in Western Sydney, and SYD2 (with more than 110 MW of capacity) in Sydney’s North.

AirTrunk’s development of SYD3 follows fellow market leaders NextDC’s and DCI Data Centers’ investments in Western Sydney, with NextDC acquiring a 12.4 hectare site at Horsley Park for the purposes of a 300 MW facility⁴  and DCI Data Center developing an AUD400 million facility in nearby Eastern Creek.⁵

Changes in state framework

In response to the economic effects of the COVID-19 pandemic on the domestic economy, and in recognition of the economic benefits of data centers, the New South Wales (NSW) state government announced the temporary reclassification of data centers as State Significant Developments (SSDs).

An SSD is a development that the state government has deemed to have state significance due to, for example, the economic value of the development. A development application for an SSD is assessed at a state level, rather than at a municipal level.

By reclassifying data centers as SSDs, the NSW state government has recognized the short and long-term economic importance of data centers to the state economy. Data centers offer immediate short-term benefits – they are relatively simple and quick to build, generating jobs in the development and construction stage. Once they are operational, they create direct and indirect jobs, including highly specialized jobs such as data center engineers, creating significant economic benefits for the community. AirTrunk, for example, announced that its SYD3 facility will create hundreds of new jobs in Western Sydney during both the construction and operational phases.⁶  Additionally, IBISWorld has reported that over the ten years through to 2024-25, the contribution of data centers to the Australian economy is expected to increase by an annualized 11.3%, thereby outperforming GDP by 2% over the same period.⁷

Summary

Data centers in Australia are an increasingly attractive asset class that is showing positive signs for future growth. While Australia was an attractive location for the development of data centers before the COVID-19 pandemic, the acceleration of digital working and digital lifestyles as a result of the pandemic has stoked the flame of data center development, especially in Sydney.

The NSW state government’s reclassification of data centers as SSDs is express recognition of the potential of this asset class to not only grow, but to assist economic recovery.

As such, investment for the purpose of data center development will undoubtedly continue to be a focus for the Australian real estate industry in the coming years. It can also be expected that data center assets will continue to attract interest from local and foreign developers wanting to capitalize on this growth market. The acquisition, development, and subsequent sale of data center assets will provide an interesting area for not only DLA Piper’s Real Estate practice, but for the global Real Estate practice in the coming years.