SINGAPORE/HONG KONG/SYDNEY - Global investors are queueing up to invest in data center operators in Asia Pacific either by buying stakes directly or via public offerings, unfazed by their rich valuations that are driven by demand for artificial intelligence-based services.

Many industry executives say the regional data centers will continue to command high valuations due to the nascent nature of the industry and its growth outlook. Some, though, say a lack of robust infrastructure could cast a cloud on their outlook.

Data centers house computer servers and equipment that companies use to process and store data.

A valuation benchmark for the sector was set in September when a consortium led by alternative asset manager Blackstone agreed to buy Australian data center group AirTrunk for an implied enterprise value of over A$24 billion ($15.58 billion), or over 20 times the target's forward core earnings.

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The process to sell a minority stake in Indonesian data center NeutraDC, for example, has attracted interest from Singapore Telecommunications (Singtel) and BDx Data Centers, among others, two sources with direct knowledge of the matter said.

A sale of roughly 20 percent to 30 percent stake in the data center arm of Indonesian state-owned communication company Telkom, which kicked off in October, could value the business at more than $1 billion, sources have said.

Brokerage BRI Danareksa Sekuritas' analyst Niko Margaronis said NeutraDC could be valued at more than 20 times core earnings helped by factors including a capacity expansion plan to reach 500 megawatt by 2028 to 2030, from around 60 MW by end-2024.

Telkom group spokesperson Ahmad Reza told Reuters the sale process is "underway and progressing well". He declined to comment on details including valuations, stake sale size and parties interested.

BDx, an Asia Pacific data center operator backed by US-headquartered I Square Capital, declined to comment. Singtel did not respond to requests seeking comment.

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In another example, Australia's HMC Capital said on Nov 21 that strong interest from investors had led the company to upsize the IPO of its data centers business DigiCo REIT by A$100 million to A$2.75 billion.

The listing, Australia's largest this year and scheduled to debut on the local bourse on Dec. 12, translates into a valuation of 26 times forward earnings, according to DigiCo's IPO prospectus.

The new valuation benchmark for data center deals compares with average market-wide multiple of around 16 times core earnings in the broader private infrastructure deals globally, according to asset intelligence and data company Realfin.

"Valuations of data center assets are reflective of the rapid growth currently being experienced by the sector, driven by large orders from hyperscale customers," said Manjit Balgir, Bank of America's Asia telecom and digital infrastructure head.

Execution risks remain

The AirTrunk deal has propelled Asia Pacific to the top of the M&A league table in the global data center market this year, with deal value totaling $17.03 billion, more than half of the global transactions, LSEG data showed.

The high valuations for the sector in Asia are partly linked to the nascent nature of the business in the region, and to data center operators adding more capacity as countries and companies respond to booming demand for AI.

"If someone comes and gives you a one gigawatt contract, you're probably doubling or more than doubling the capacity," said KKR's director Projesh Banerjea, referring to the still-nascent state of the data center market in Asia.

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KKR bought a 20 percent stake in the Asian data center of Singtel for S$1.1 billion ($818.64 million) last year and partnered Singtel to invest S$1.75 billion in ST Telemedia Global Data centers in June. Earnings multiples for the deal were not disclosed.

The sustainability of the valuation premium in the coming years, however, will be tested by execution risks in markets where power capacity and infrastructure are inadequate, some investors said.

Reliability on the actual delivery of data centers will become a lot more critical for tenants, said Gilles Chow, CPP Investments' managing director and head of real estate for North Asia.

"Ultimately we see Asia Pacific data center markets remaining a positive growth story in the medium term but anticipate that growth in the sector may cool a little as capacity comes online," said Charlie Wilson, Asia M&A and private equity head at law firm Sidley Austin.