Why rising demand for data centres will not rescue Hong Kong office buildings with high vacancy rates

Locally, demand for AI tools is also likely to expand. Nearly three-quarters of Hong Kong’s businesses feel they are ready to incorporate new technologies including AI by the end of next year, rising to 90 per cent by the next decade, according to an HSBC survey released last month.

Moreover, by the end of March, Hong Kong’s prime office vacancy rates had risen to 13.1 per cent from 12.9 per cent in February, according to JLL.

And while a positive outlook for data centres has led to the redevelopment of office buildings around the world, Laughlin said this would not be practical for many office towers in Hong Kong.

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“Historically, for retail data centres, there have been situations where office buildings have been converted over to be used for data centres for retail applications,” he said. “And on the hyperscale side, there are examples in Hong Kong, particularly, of industrial buildings being converted over for hyperscale data centres.”

Retail data centres are for businesses that need reliable data facilities but not a huge amount of space and power. Hyperscale centres can support the massive data requirements of technology firms.

Converting an office building into a hyperscale centre is not practical because the floor loading and size of floor plates are just not sufficient for it to make sense economically, Laughlin said.

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“You’d have to spend too much money in order to do that conversion for it to make sense,” he said. “So it’s not that it hasn’t happened, or that there aren’t certain examples where you’d see a conversion to a data centre from other uses, but it’s quite rare and becoming rarer in the hyperscale space.”

At least 100 ageing office buildings in Hong Kong need to be refurbished to unlock their rental potential, after the Covid-19 pandemic changed market dynamics and tenant expectations, JLL said. More than half of the city’s grade A and B buildings are considered ageing as they were built more than 20 years ago, with rents 10 to 40 per cent lower than well-maintained and newer buildings, the property consultancy said.

More feasible for data centres would be the conversion of warehouses with higher specifications, said Samuel Lai, executive director, advisory and transaction services, logistics services at CBRE Hong Kong.

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Other analysts have also said that there are certain regulations in Hong Kong that would have to be complied with before an office building could be converted for other uses.

“The majority, if not all, of the office buildings in Hong Kong are not suitable for data centre conversion because of building characteristics and the higher specifications required to construct data centre facilities,” said Dedi Iskandar, CBRE’s head of data centre solution, advisory and transaction services, Asia-Pacific. “Moreover, data centres usually require industrial land zoning rather than office and commercial land zoning.”

On the other hand, with data centres gradually becoming their own investment segment, instead of being categorised as an alternative asset, those who have allocated capital for such investments are likely to reap gains, analysts said.

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“In Hong Kong, the supply pipeline is still relatively constrained primarily due to the shortage of land dedicated for data centres and power supply – hence premises that are capable of accommodating large data centres remain highly sought after,” said Eugene Wong, partner at law firm Mayer Brown.

Investment allocation for data centres is not quite there yet, said PGIM’s Laughlin.

“But it’s going to be a significant one.”