[Contribution] Korea's booming data center market

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By Robert Wilkinson

South Korea is regarded globally as one of the most digitally advanced economies: Korea launched the world's first commercial 5G network. The country is known for having the fastest internet speeds as well as the highest internet penetration, with more than 97.5 percent of the population regularly accessing the internet, and it is the leader in semiconductors and smartphones.

Yet, until recently, the data center market was trailing behind other world cities. This is because most of the data centers in Korea were privately owned and operated by a handful of telecommunications companies, Chaebol companies and their subsidiaries. Global players had a limited presence in the market. However, this has started to change.

Robert Wilkinson

South Korea is a hotbed for new technologies. Bloomberg regularly ranks South Korea top of their annual Innovation Index. The Index analyzes dozens of criteria using various metrics, including research and development expenditure, manufacturing capability and concentration of high-tech public companies to rank the most innovative countries. Interestingly, Singapore is the only other country in the APAC Region to make the top ten in the last edition.

South Korea is also home to 10 unicorns, the name given to privately-held startup companies worth more than $1 billion, making it the third biggest cluster of unicorns in the APAC Region, behind only, the far more populous countries of China and India.

Over the last three years, the pandemic has accelerated certain tech trends in Korea that we were already seeing, namely the explosion of e-commerce, new online payment technologies, fintech and gaming. The growth of these as well as the rise in hybrid working has led to a huge demand for digital infrastructure which has attracted rapid investment in new data centers.

Competition for assets

This surge in demand has seen data centers emerge as an independent investment class, making for a very crowded marketplace. Now, not only are the big tech players such as Amazon Web Services (AWS), Google Cloud and Microsoft looking to invest to build scale and enter new markets, but both Korean real estate and infrastructure investors such as IGIS AMC, Pacific AMC and GS Construction as well as global investors such as GIC and The Canadian Pension Plan (CPPIB) are entering the scene.

Korean Asset Management companies (AMCs), private equity funds, institutional investors (such as pension and mutual funds) and sovereign wealth funds are actively targeting data center investments in Korea as they offer long-term, stable returns ― due to high initial setup costs, data center tenants prefer long-term contracts ― and they are a safe way to diversify their portfolio.

In Korea, the data center market in 2022 was valued at $4.2 billion and with current demand, the market is expected to grow at a CAGR of almost 7 percent reaching $6.2 billion by 2028. This is helped by generous support from the Korean government for development in the sector.

Naver's data center in Chuncheon, Gangwon Province / Courtesy of Naver

Focus on ESG

The sector is not immune to challenges though, investors should be aware of rising construction and electricity costs. Data centers are also receiving a lot of scrutiny for the large amounts of power required to operate servers and keep them cool. This is at a time when there is an increasing focus on ESG and on reducing our energy usage. Korea remains the world's fourth largest importer of coal but has set ambitious sustainability targets under the Green New Deal which focuses on creating a low-carbon and climate-neutral economy.

The data center sector is responding. In the U.K. for example, Amazon has purchased the entire power output from Scottish Power's 50-megawatt wind farm located on the Kintyre Peninsula. Closer to home, the Korean telecommunications giant, KT, has partnered with the state gas company to create a carbon-free cooling system for data centers. The process involves converting natural gas from its liquefied form (at a chilly minus 162 degrees Celsius) back into a gas at room temperature. The process is catalyzed by drawing heat from the surrounding servers, thereby reducing the need for electric air conditioners.

Given our increasing reliance on cloud technologies and the growing trend of hybrid working accelerated by the pandemic, we expect exponential demand for digital infrastructure for many years to come. As data centers converge where technology, real estate and infrastructure meet, investors across sectors are entering the market creating ever-increasing competition for assets. The data center boom in Korea is just getting started!

The writer is Managing Director of Colliers Korea, Vice Chairman of the British Chamber of Commerce in Korea (BCCK) and a Fellow of the Royal Institution of Chartered Surveyors (FRICS). Any opinions expressed in this article are those of the author and do not purport to reflect the opinions or views of any of these organizations.