How To Make Hong Kong A Data Centre Hub

Transcription

1 For discussion Paper No. 5/2009 on 29 May 2009 DIGITAL 21 STRATEGY ADVISORY COMMITTEE Consultancy Study on the Development of Data Centres in Hong Kong Purpose This paper informs Members of the key findings of the Consultancy Study on the Development of Data Centres in Hong Kong. Background 2. In 2007, the Focus Group on Professional Services, Information & Technology and Tourism ( Focus Group ) under the Economic Summit on China s 11 th Five-Year Plan and the Development of Hong Kong recommended the Government to promote Hong Kong as a data centre hub in the region. The Government was specifically requested to review whether the prevailing land policy would hinder the development of data centres in Hong Kong. 3. The Innovation and Technology Commission (ITC) followed up on the recommendation and subsequently commissioned a consultant to conduct an in-depth study on this issue. The consultant was asked to identify the strengths and weaknesses of Hong Kong s potential as a hub for data centres, assess the market demand for data centres in Hong Kong and the corresponding supply, and identify measures to promote the development of data centres in Hong Kong. This consultancy study was completed in March

2 Key Findings of The Study 4. The executive summary of the consultancy report is at Annex for Members reference. A copy of the full report is deposited with the secretariat of this committee. The key findings of the consultancy study are summarized as follows: - (a) In terms of quality factors, Hong Kong is well recognized by the IT industry and business organizations as an excellent location for higher end data centres. Hong Kong benefits from its proximity to the Mainland, conducive business environment, stable government, transparent and independent legal system, reliable power supply, sound communications system, internet connectivity and low risk of natural disasters. (b) In terms of cost factors, Hong Kong is considered as one of the most expensive cities for operating data centres. Property price and labour costs contribute to our high cost structure. Unable to compete with economies offering lower costs, Hong Kong could target becoming a hub for high-end data centres. (c) At present, there are more than 20 data centre 1 providers in Hong Kong, offering space, housing and collocation services. About half of them invested in dedicated data centre facilities, and the total space occupied by these providers is about 1.3 million square feet. There are also other end user data centres in Hong Kong, and they occupy about 0.8 million square feet of space. Data Centres are now concentrated in Quarry Bay, Chai Wan, Kwun Tong, Kowloon Bay, Tsuen Wan and Tai Po. (d) Based on market intelligence and historical trend, the estimate compound annual growth rate for data centre space would be 9% to 10% in the next three to five years. However, the 1 There is a loose, general classification system in the industry to divide data centers into four tiers (I, II, III and IV). In gist, Tier I is the most basic (e.g., an in-house server room operated by a small firm) while Tier IV has the most stringent security and technical standards only required by a very few users. However, this system is only a reference scheme rather than a set of hard-and-fast rules, and many centres indeed fall into the definition of one Tier in this aspect but another Tier in another. For the purpose of this study, its focus is only on the data centres from higher tiers (Tiers III and IV), for which Hong Kong has a genuine competitive edge. 2

3 actual growth could be significantly lower due to the recent financial turmoil and its impact to the financial services sector in particular. (e) The supply of data centre space is mainly met by two sources: (i) existing industrial and commercial buildings converted for data centre purposes, and (ii) newly built on sites available in the open market or at the Industrial Estates administered by the Hong Kong Science and Technology Parks Corporation (HKSTPC). At present, there are at least 8 sites available in the Lands Department s application list which are suitable for data centre development, but so far no application has been received by Government. (f) As at first quarter of 2008, about 0.3 to 0.4 million square feet of commercial and industrial space were available for data centre use in the open market. The Lands Department has put in place various measures to facilitate conversion of commercial and industrial space for other uses, including data centres. (g) Taking into account both the demand and supply factors, the consultant suggested that the market supply of data centre space is indeed tight in terms of existing industrial buildings but space remains available from the open market, albeit with more efforts and longer lead time than providers consider desirable, as well as from the Industrial Estates. In general, Hong Kong s data centre market is in broad equilibrium. It has been responding to the growth in demand though in a relatively cautious way, reflecting the commercial judgments of the property developers, landlords of the commercial and industrial premises, and data centre providers. With the experience in the dot com bust in 2000, both property developers and data centre operators tend to invest cautiously to avoid any overcapacity. At present, there is no need for the Government to change its land administration policy or give preferential treatment to data centre development as the market can adjust itself to meet the demand. 3

4 (h) The Government and HKSTPC should keep in view of potential mega project opportunities arising from future technological improvements, new business models and industrial trends. As these projects can greatly strengthen Hong Kong s position as a key data centre hub in the region and bring in decent economic benefits, Government should not rule out the possibility of introducing new measures to facilitate such projects in the future. Government s Position 5. The Government wishes to facilitate the development of data centres in Hong Kong. This is in line with the key areas of focus and desired outcomes of the Digital 21 Strategy. Although there may be limited direct employment and economic value-added as a result of data centre operations in themselves, we consider that the location of a data centre can influence the location of other economic activity such as back-office operations, and product development. Moreover, an attractive environment for data centres can position Hong Kong better in bids to host major platforms for electronic business here. Examples of the latter may include major financial and mercantile trading exchanges, electronic documentation service platforms in support of legal and conveyancing services, and cloud computing platforms used to provide services for enterprises and consumers. 6. The Government sees a distinction between the current generation of data centres and next-generation data centres. The current generation consists mostly of small and medium-sized data centres for single users, and multiple-tenant locations. The next generation will include much larger scale data centres, being used as regional hubs by large businesses and by providers of online services, as well as data centres utilizing the cloud computing concept. 7. We note that the consultant s analysis on the supply and demand of data centre space in the coming years relates mostly to the current generation of data centres. The bulk of demand for space for 4

5 such data centres has been met by private developers and operators through the development of new facilities on redeveloped sites and conversion of existing industrial and commercial premises. The Lands Department expedites the processing of applications for change in use of existing industrial/godown premises for uses including data centre development by way of temporary waivers. Meanwhile, new leases granted for commercial and industrial uses allow for data centre use without the need for lease modifications for temporary waivers. Since 2001, the Lands Department has received a total of 9 such applications for data centre purpose and all of them were approved. Most of the cases took about 2 months to process. The consultant has found no evidence that the prevailing land administration policy has constrained the development of the current generation of data centres in Hong Kong. Nevertheless, we note that the industry still regards there is room to reduce the lead time and effort required for the setting up of data centres. OGCIO will review with the industry whether there are ways to make further improvements in this aspect. 8. So far as the next generation of data centres is concerned, the requirement is likely to be for larger sites. We also understand from contacts that have been made with InvestHK that conversion of existing premises is unlikely to provide a competitive option for the operation of a next-generation data centre. At the time of the consultancy study, there were eight sites on the Lands Department s application list which may be suitable for data centre development. In addition, large-scale data centres can be established in industrial estates under HKSTPC s current admission policy, provided that it can be shown in any particular case that the project cannot be accommodated in ordinary multi-storey industrial or commercial buildings. Such a use would be favoured over other applicants because of the heavy investment in new and improved technology. 9. At present, there are two data centres in the industrial estates. The first was admitted to the Tai Po Industrial Estate as part of a larger satellite and telecommunications project in 2000 while the second one was admitted to the Tseung Kwan O Industrial Estate in 2005 as suitable private land meeting the high requirements of that particular project was not available. Both data centres are of very high 5

6 technology and service levels (Tier III plus) and involve heavy capital investment. Given the nature of the business of data centres and recognizing third party demands for data centre services were on the rise, the HKSTPC in December 2007 agreed to allow data centres in the industrial estates to sublet their space and facilities to the first level (i.e. to other service users, not other data centres). However, subletting to other data centres is not allowed under HKSTPC s prevailing policy. 10. To gauge market demand, the HKSTPC in June 2008 included three sites in Tseung Kwan O Industrial Estate (one of the sites includes a surrendered building suitable for conversion into a data centre) in an Expression of Interest (EOI) exercise. Nine companies responded, of which two to three are considered to be in a position to proceed further with their land request. With the completion of the consultancy study, HKSTPC will make reference to the findings of the study and revisit its admission policy for data centres as appropriate to wrap up the EOI exercise and respond to the companies concerned. 11. The data centre market continues to evolve. Because of the global trend towards green computing and the advent of technologies and service models promised by the notion of cloud computing, market dynamics are likely to change. In Hong Kong, there is yet little publicly available industry data on the composition of and interdependencies among the ingredients making up the data centre sub-sector. To facilitate Hong Kong s development into a regional hub for data centres under the Digital 21 Strategy, OGCIO will continue to monitor the market dynamics of the industry, including the lead time and effort required to establish new data centre space in Hong Kong, to promote the merits of Hong Kong in this field and to facilitate the development of mega projects as necessary. InvestHK and OGCIO will facilitate companies wishing to establish large-scale data centres to plan and execute their projects and continue to liaise with the relevant industry bodies. Advice Sought 12. Members are invited to comment on the findings of the 6

7 consultancy report. It would be useful to have members views on the Government s proposed approach of being more active in facilitating the establishment of large-scale data centres, while leaving the current generation of data centres to be addressed by the market. Innovation and Technology Commission and Office of the Government Chief Information Officer Commerce and Economic Development Bureau May

8 IBM Global Business Services Chapter 1 Executive Summary Sustaining Hong Kong s success as a data centre hub This Final Report provides IBM Global Business Services findings and recommendations from the Consultancy Study on the Development of Data Centres in Hong Kong conducted on behalf of the Innovation and Technology Commission (ITC) of the Hong Kong Special Administration Government (HKSARG). The objective of the project was to gauge the market demand for data centres, review existing land policy related to data centre establishment, and recommend any necessary measures to promote the development of data centres in Hong Kong. For further details of the project background and approach, please refer to Appendix A. The growth in the use of information technology (IT) in business, government and every other aspect of economic and social activity has driven huge growth in the demand for computing capacity and the data centres that provide it. Although the current financial and economic uncertainty will have an effect in the short term, there is little doubt that mid to long term demand for data centres will continue to grow significantly. Our study highlighted that Hong Kong is recognised by the IT industry and organisations using the industry s services as having many strengths and attractions as a location for higher end data centres. Although some economies compete at lower cost, many businesses have particular requirements for their data centres which make a high quality if higher cost location such as Hong Kong very compelling. This represents an important opportunity for Hong Kong in terms of the direct economic contribution from the data centre sector, and as part of the Hong Kong s broader efforts to be a location of choice for high value, high technology and innovative businesses. Our view is that these benefits to Hong Kong justify continued support and facilitation of the data centre industry by the HKSARG. Our terms of reference directed us to review the adequacy of supply of space. Given the limited supply and relatively high price of land and commercial space in Hong Kong, it is not surprising that concerns have been voiced about whether this limits the City s ability to attract and retain data centres. In particular, we heard significant concerns that finding appropriate space for high tier data centres had become difficult. Our work confirms that the supply of appropriate space for data centres is indeed tight, especially as the requirements for data centres continue to escalate. Based on our analysis, this market situation mainly results from the cautious approach of the market players in the property and data centre sectors who tend to wait for an anchor tenant before further development would take place. Nevertheless the Study revealed that the data centre industry has made strides in recently in finding and converting existing commercial and industrial buildings for use as dedicated data centres. We examined the role of the HKSARG in the regulation of the use of premises and land as data centres, We found that the standard waiver scheme administered by the Lands Department (LandsD) is working effectively to support conversions of industrial space for data centre use. Our analysis also suggests that there is further land and space available from the open market and the HKSARG s industrial estates, which could be brought into use through further conversion or new build. On this basis we have concluded that the market is in broad equilibrium today in relation to demand for current data centre configurations, and the current economic environment may well slow demand for such centres. Looking forward, technology will continue to develop and the requirements for data centres will continue to escalate, and at some point the industry may outgrow the conversion model and there would then be a need to review the adequacy of supply of appropriate sites. In Consultancy Study on the Development of Data Centres in Hong Kong Final Report Copyright IBM Corporation

9 IBM Global Business Services addition, new business models may emerge from the current industry developments (such as cloud computing ) which may create demand for very different facilities which again could require a different approach. These possible developments make it important that the HKSARG continues to monitor developments in the industry and to be open to taking appropriate steps to facilitate continued success. In the following paragraphs we summarise these findings in more detail, and we set out our full findings, conclusions and recommendations in our report. Growth in demand for data centres Increasing reliance on and exploitation of information technology (IT), driven by economic and business growth, has led to a surge of demand for computing power and the data centres that support it. With the next generation internet - Web and cloud computing enterprise and consumer users will be able to make even more extensive use of the internet for their commercial and personal computing needs. Users will be able to run their software applications entirely through a browser in the future, but retain ownership and exercise control over the data. An "architecture of participation", originating from the open software development movement, will encourage users to add value e.g. through the exchange of multimedia content, participation on social networking websites, expert inputs to the online encyclopaedia. All these trends will drive escalating demand for data centres. In parallel, global concerns over the increasing consumption of power will create pressures to adopt green IT practices and technologies. These trends will demand constant rethinking of the role of IT and the design of data centres. Given the importance of IT and therefore data centres to business, the ability to establish and operate data centres has become another important consideration for a location for businesses. Although the availability of fast communication links has in theory made it possible to place data centres anywhere in the world, there are many businesses that place a premium on placing their data centres in high quality locations typically nearby their business operations. This is especially the case for the financial services industry. Many financial institutions would require their trading systems to be hosted alongside their operations to avoid any delay or latency in their trading activities, and to meet certain data storage requirements prescribed by the Hong Kong Monetary Authority (HKMA). Thus the ability to host data centres in the city will have an impact on the broader efforts to encourage businesses to locate in Hong Kong. Also with the recent CEPA signed in July 2008, any Mainland-incorporated banking institution established by a Hong Kong bank will be allowed to locate its data centre in Hong Kong, subject to fulfilment of certain requirements. The recent global financial crisis may have an impact on growth in the short and medium term, but the longer term trends are likely to reassert themselves. Hong Kong has many advantages as a preferred location for data centres Our market research and analysis of Hong Kong s strengths, weakness, opportunities and threats, confirm that Hong Kong is recognised as an excellent location for data centres. Hong Kong s key advantages include: The positive general business environment Consultancy Study on the Development of Data Centres in Hong Kong Final Report Copyright IBM Corporation

10 IBM Global Business Services The stable system of government and the transparent and independent legal system Physical security in terms of law and order Reliable power supply Extensive and value for money communications and internet connectivity Low risk of natural disaster such as earthquake Hong Kong s advantages have led many local and overseas organisations to establish data centres in the city. Nonetheless there are some concerns that have been expressed about the availability of appropriate space to locate data centres one main reason for the commissioning of this consultancy study. During our study, we have conducted a number of in-depth discussions with a cross section of stakeholders to obtain their perspectives on the current and future market development, and their views on the supply and demand situation in Hong Kong. In addition, we have used available data to estimate the supply and demand situation. Accommodation requirements for data centres Requirements for data centres particularly in terms of resiliency have become tougher under the high tier data centres configuration mainly driven by the financial institutions. The requirements for appropriate accommodation have also tightened. These include ability to bear heavy loads, provision of very high power capacity, access to broadband internet connectivity, installation of back up generators and fuel tanks, and high physical security. Higher resiliency requirements also mean that data centres increasingly need to be located in buildings that are dedicated to data centre use (e.g. converting whole buildings) rather than mixed use buildings that often have dispersed ownership. As a result data centres are more likely to be found in commercial and industrial premises in areas such as Chai Wan in Hong Kong Island and Tsuen Wan in Kowloon. Demand and supply for data centre space In 2007 to early 2008, the total volume of space used for data centres in Hong Kong is relatively small as compared to the total stock, or indeed the available commercial and industrial space in Hong Kong. Third party data centre providers occupy around 1.3m sq. ft. of space today. This plus space occupied by in house data centres gives a total of say 2.0m to 2.5m sq. ft. of data centre space. According to our primary and secondary research, the compound annual growth rate in demand for space for data centres in Hong Kong has been estimated to be around 9% to 10% for the coming 3 to 5 years. This growth has been mainly driven by the financial institutions. However, this estimate was prior to the impact of the recent market turmoil and reliable estimates taking account of this are not yet available. In terms of supply, according to the information provided by CB Richard Ellis (a third party property consultant) in the first quarter of 2008, there is around 300,000 to 400,000 sq. ft. of potentially available commercial and industrial space in Hong Kong which could be Consultancy Study on the Development of Data Centres in Hong Kong Final Report Copyright IBM Corporation

11 IBM Global Business Services appropriate for use as data centres 1. In reality, based on our experience, a smaller volume of suitable space (i.e. 25 to 50% or 100,000 to 200,000 sq. ft) may be available because of the technical and commercial requirements for high tier data centres mentioned above. However our investigation also suggests that more property developers and landlords are making their quality warehouse space available for data centres in order to obtain a higher return on their property investments. During the course of this study, we have found that LandsD has 8 potentially suitable sites available for application. Most of these sites have a potential gross floor area ranging from 400,000 to 600,000 sq. ft. This land would require new build for data centre facilities. As of the submission of this Final Report, there has been no application filed by developers. In addition, the Hong Kong Science and Technology Parks Corporation (HKSTP) recently completed an Expression of Interest (EOI) exercise to test the market s interest in sites at the Industrial Estate in Tseung Kwan O (a 1.5 hectare green field site and an existing building of 170,000 sq. ft.) for data centre development. The EOI was sent to 27 companies including real estate agents and was promoted openly through newspapers. The total response rate was 9. One new build of a dedicated data centre on any of these sites would dramatically change the balance of supply and demand under the current circumstances. Of course, as we conclude this study, the economy as a whole is experiencing the global financial turmoil. The financial services sector is particularly affected. Hence it is expected that there is a significant impact on the growth in demand for data centres. Analysts have not yet re-estimated demand but many would expect a drop in growth and this would further ease the balance of supply and demand. In summary, our findings suggest that the market supply is indeed tight in terms of existing industrial buildings but space remains available from both the open market and the HKSTP's industrial estate. Land administration policy with regards to data centre use Whatever the position on market demand and supply it is important that Government s own administration of land should not impose particular constraints on the data centre sector. With our investigation, we have examined the role of lease requirements in the supply of appropriate space for data centres. Our conclusion is that in the majority of cases, depending on whether the premise is permitted under the lease conditions for the private lot, there is likely to be a need to seek a temporary waiver of a permanent lease modification in order to allow for such use. While the general land policy is to process waivers or lease modification individually through a relatively longer process of negotiations and assessments of the required fee/land premium, LandsD has since 2001 put in place measures to help expedite changes in use of existing industrial premises for other uses including data centre uses. For instance, all new commercial and industrial leases permit data centre. For older leases, LandsD has simplified the documents required for a temporary or life-time waiver. It also operates a waiver scheme with standard rates predefined which allows conversion to data centres in exchange for a reasonable payment and the process can be completed within 2 months. Detailed statistics are not available on the numbers of applications but LandsD has 1 Leung, T. Hong Kong Datacenter Shortage: Critical?, Computerworld Hong Kong, March 05, 2008 Consultancy Study on the Development of Data Centres in Hong Kong Final Report Copyright IBM Corporation

12 IBM Global Business Services indicated that the 2-month time commitment under the standard waiver scheme is met and we did not come across complaints to the contrary. Conclusions and Recommendation Our review confirms the scale of the data centre opportunity and the benefits both direct and indirect that flow to Hong Kong from the growth of the data centre sector in Hong Kong. It also highlights that Hong Kong has many strengths and attractions for the industry and for end users. Hong Kong is well recognised as an excellent, if higher cost, location for higher end data centres. This is exactly the high value space that Hong Kong should aim to excel in. Given these positive conclusions we focused on the one area of genuine demand the availability of appropriate space for such data centres. Our Study concluded that the market for suitable space for current data centre models is in rough equilibrium even though it can take time and persistence to find a major new facility because the market players are cautious. This situation reflects the commercial judgements of the market both the developers and landlords of commercial and industrial premises, and data centre providers. We were told that unsuccessful ventures in similar technology ventures during the dotcom boom and bust had led investors to be cautious. And successful ventures generally require collaboration between the property development and data centre services sectors. In reality this means that providers would prefer to wait until clients show significant commitment prior to making investments such as sourcing, converting and/or building facilities. Through this approach, the market manages down risk but also creates delay for end users and data centre operators seeking to open new capacity. Since the market maintains low supply of appropriate premises at any one time, it may take longer than expected to respond to any immediate surge of demand. Therefore we conclude that the market is responding to the growth in demand but in a relatively cautious way. This in turn leads to a view amongst some market players that there is a land shortage in the market. In our view commercial decisions about the right level of investment and the right land uses are best left to the market and individual market players. Hence it must be for those engaged in the relevant sectors land development, industrial and commercial property development and conversion, and data centre service provision - to decide how fast and in what ways to invest to address the market opportunity. Given the benefits to Hong Kong both through the direct impact of data centres and through the indirect effects of enabling high value enterprises to come to Hong Kong, we recommend that the HKSARG should engage and communicate with the industry stakeholders, continue current measures, and monitor, promote and further facilitate the future development of the sector in Hong Kong. In more specific terms we recommend that the HKSARG: Shares the results of this consultancy study with the key stakeholders highlighting that: the industry has been successful in developing solutions to meet the current demands for data centres. Communicates to key stakeholders that the Government recognizes the importance of anticipating new approaches and opportunities to the industry and that may require the further steps to facilitate its future development. Continues the current facilitating measures including its support to potential overseas investors and to facilitate awareness and networking amongst the data centre service sector in the local Hong Kong business community and to keep in place the current waiver Consultancy Study on the Development of Data Centres in Hong Kong Final Report Copyright IBM Corporation

13 IBM Global Business Services scheme to facilitate the conversion of existing industrial and commercial buildings to data centre usage. Continues its effort in monitoring the market dynamics in order to help the HKSARG assess and respond appropriately, should a systematic shortage emerge. Keeps an open mind on the potential need to take further steps to facilitate continued developments in the Hong Kong data centre market should technical developments outgrow the current conversion model, or should new business models emerge through cloud computing and other developments that may require special provision. Remains open to the possibility of using space in the Industrial Estates for data centre usage where the use could not be accommodated in normal commercial or industrial buildings which may be the case if data centre requirements continue to escalate and or mega project opportunities emerge from new business models. Considers and facilitates development of the high profile and mega data centre projects as part of broader efforts to promote Hong Kong as a location for high technology, high value industries in order to strengthen the overall Hong Kong s brand and positioning among the competing economies. Consultancy Study on the Development of Data Centres in Hong Kong Final Report Copyright IBM Corporation