Data center REITs are about to emerge, with Runze Technology taking the first sip of the soup.

Runze Technology is planning the issuance of the first data center public REITs.

In an announcement on April 18, Runze Technology disclosed its intention to use the International Information Cloud Aggregation Core Port (ICFZ) project - Data Center A18 construction project and its ancillary facilities as the underlying assets to carry out the pilot application for infrastructure real estate investment trust funds (REITs).

Coincidentally, the next day (April 19), the China Securities Regulatory Commission (CSRC) released the "Sixteen Measures for Capital Market Services to Support the High-Quality Development of Technology Enterprises." Among them, it mentioned supporting eligible new infrastructure, data centers, and other new types of infrastructure, as well as technology innovation industrial parks, to issue REITs in the field of technology innovation, thereby broadening incremental funding sources.

With the support of favorable policies, data center REITs are on the horizon, and Runze Technology is expected to take the lead.

As of now, 35 public REITs have been listed and issued, with a total scale of 110.6 billion yuan. The underlying assets cover industrial parks, energy infrastructure, warehousing and logistics, affordable rental housing, ecological and environmental protection, transportation infrastructure, and consumer infrastructure.

Will Runze Be the First to Taste the Soup?

During the earnings conference held on April 22, Shen Jingwei, the Board Secretary of Runze Technology, mentioned that the company is considering issuing public REITs for two main reasons:

First, according to the notice from the National Development and Reform Commission (NDRC), the state encourages pilot issuances of public REITs in multiple industries to revitalize existing assets and form a virtuous cycle between existing assets and new investments. "Currently, there is no complete successful issuance case in the IDC industry."

Second, as a leading enterprise in the IDC industry, Runze Technology owns multiple mature data center projects with complete procedures, stable operations, and strong profitability, meeting the issuance requirements for public REITs.

It is reported that the public REITs infrastructure project proposed by Runze Technology is located at No. 2 Liyuan Road, Langfang Economic Development Zone, Hebei Province, with 5,897 operational cabinets, an occupancy rate of 99.5%, and a total IT power exceeding 42MW.

Meanwhile, according to the establishment process, Runze Development, as the original rights holder, first needs to spin off the infrastructure project to a specially held project company, with Runze Development holding 100% of the project company's equity. Then, Runze Development will establish a special purpose vehicle (SPV) and transfer 100% of the SPV's equity to the special plan.

Southern Capital serves as the asset-backed special plan manager, Southern Fund as the fund manager, and Huatai United Securities as the financial advisor. After the establishment of Runze REITs, it plans to apply for listing and trading on the Shenzhen Stock Exchange. Runze Development, as the original rights holder, will act as the operating company during the fund's tenure, providing operational management services to the infrastructure project and regularly collecting operational management fees, while issuing and establishing the asset-backed special plan.

Data shows that Runze Technology is a comprehensive solution provider for computing power centers, with main businesses covering IDC and AIDC. To date, the company has established seven AIDC intelligent computing infrastructure clusters in six major regions across China, including Beijing-Tianjin-Hebei (Langfang), Yangtze River Delta (Pinghu), Greater Bay Area (Foshan and Huizhou), Chengdu-Chongqing Economic Circle (Chongqing), Gansu (Lanzhou), and Hainan (Danzhou), basically completing the national "integrated computing power center system" framework layout, with a total of approximately 61 intelligent computing centers and 320,000 cabinets planned nationwide.

In terms of performance, Runze Technology has grown rapidly in recent years. From 2020 to 2023, its revenue was 460 million yuan, 2.047 billion yuan, 2.715 billion yuan, and 4.351 billion yuan, respectively, with net profits of -239 million yuan, 721 million yuan, 1.197 billion yuan, and 1.758 billion yuan, respectively.

An Untapped Blue Ocean

It is understood that Runze Technology is not the first to venture into data center public REITs. Before this, data center companies such as Sinnet have also attempted public REITs.

As early as 2020, Sinnet intended to promote the application of its China Internet Network Information Center (CINIC) data center for public REITs, with plans to raise up to 5.7 billion yuan, but there has been little progress since then.

Analysis points out that despite the rapid development of artificial intelligence (AI) and machine learning, which has driven strong demand for computing power and the rapid construction of data centers nationwide, as infrastructure projects, data centers also face issues such as high construction costs and long payback periods, which constrain the capital of IDC enterprises.

According to a report on an intelligent computing center project previously disclosed by Runjian Co., Ltd., a small intelligent computing center with an investment of no more than 200 million yuan requires at least six years to recoup the investment. For government-led intelligent computing centers, which also need to provide 普惠性 public computing services, the payback period will be further extended.

Of course, the profitability of data centers is also considerable. Runjian Co., Ltd. also pointed out in the report that an intelligent computing center built with 200 million yuan can achieve an annual net profit of 218 million yuan after full production. If funding issues can be resolved, the investment return potential of data centers is quite vast.

Given the characteristics of high investment costs, high net profits, and long payback periods, analysis also believes that data centers are very suitable for issuing public REITs.

To date, China has not yet seen a single data center public REITs listed. Globally, pure data center REITs are also few in number.

Public data shows that as of 2023, there are two REITs products in the U.S. market focused on operating data centers: Equinix $Equinix(EQIX.US) and Digital Realty $Digital Realty Trust(DLR.US), with market capitalizations of $66.1 billion and $27.5 billion, respectively, in mid-2023.

Outside the U.S., in the Asia-Pacific market, industrial real estate investment trusts with data centers mainly include: Keppel DC Reit, Mapletree Industrial Trust, Ascendas REIT, and CapitaLand India Trust (CLINT). These REITs have consistently performed well, ranking among the top in over 150 REITs globally.

Among them, the most well-known in the market is Keppel DC REIT. This fund is Asia's first pure data center REITs, established 10 years ago. At its IPO in 2014, it set the record for the largest IPO of a real estate investment trust fund on the Singapore Exchange that year, raising $512.9 million with 9.6 times oversubscription. Since its listing, the total return of this REIT has exceeded 190%, and its managed assets have grown from approximately S$1 billion to S$3.7 billion.

According to the latest disclosed data, Keppel DC REIT's total revenue for the first quarter of the 2024 fiscal year increased by 18.4% year-on-year from S$70.4 million to S$83.4 million.

This also reflects the growth potential and investment return growth of data center REITs. Analysis further points out that given the outstanding performance of existing data center REITs, it is expected that after the official debut of China's data center REITs, they will likely become the best-performing sub-sector among public REITs.

Impressive Fundraising Capability

Today, China's IDC industry is demonstrating unlimited development potential and imagination, attracting a wave of capital.

Recently, the private equity fund established in China by Principal Financial Group (PFG) of the U.S. was successfully registered. This is the first private fund established after the wholly-owned subsidiary of Principal Financial obtained the QDLP (Qualified Domestic Limited Partner) qualification and also the first data center investment fund established by Principal Financial in China.

As early as 2021, Keppel DC REIT acquired two data centers in Jiangmen, Guangdong, marking its first foray into China's IDC market.

"China is the world's second-largest data center market and the largest in the Asia-Pacific region. China's data center market is expected to maintain strong growth momentum. The acquisition of Guangdong data centers allows us to ride the fast train of China's digital economy development, reflecting our commitment to investing in data centers with high-quality assets to provide stable and sustainable income," Keppel DC REIT stated after completing the transaction.

Keppel has been committed to exploring China's data center market. In 2020, Keppel's Alpha Data Centre Fund, in collaboration with Country Garden, invested 1.5 billion yuan (approximately S$300 million) in Huizhou, Guangdong, to build an eco-smart data center project. The project plans to construct two DC buildings, providing over 6,000 high-density cabinets upon completion.

With the rapid development of China's IDC industry, capital flows are accelerating. To better guide funds to support related infrastructure construction, policies in recent years have actively encouraged the issuance of new types of REITs, including data centers.

As early as 2020, the "Notice on the Application of Pilot Projects for Infrastructure Real Estate Investment Trust Funds (REITs)" issued by the National Development and Reform Commission mentioned encouraging pilot projects for new infrastructure, including data centers, artificial intelligence, and intelligent computing centers.

In July 2021, the "Further Notice on the Pilot Work of Infrastructure Real Estate Investment Trust Funds (REITs)" issued by the National Development and Reform Commission included new infrastructure in the pilot scope, specifically covering data centers, artificial intelligence projects, 5G, communication towers, IoT, industrial internet, broadband networks, cable TV networks, smart transportation, smart energy, and smart city projects.

Recently, the new "National Nine Articles"明确提出， to promote the high-quality development of the bond and real estate investment trust funds (REITs) market. The CSRC also reiterated its support for eligible new infrastructure, data centers, and other new types of infrastructure, as well as technology innovation industrial parks, to issue REITs in the field of technology innovation, thereby broadening incremental funding sources.

More notably, according to a message on the CSRC website on April 19, the CSRC plans to generally 参照 the arrangements for the interconnection of stocks and ETFs between the mainland and Hong Kong, incorporating eligible REITs from both regions into the Stock Connect program, further enriching the trading 品种 of the Stock Connect. This will undoubtedly attract more funds into related infrastructure construction.

In the first quarter of this year alone, Keppel DC REIT recorded a net inflow of S$54 million from retail investors, ranking among the top 20 stocks with the highest net retail inflows in the Singapore market during the period and third in the S-REITs sub-sector, behind only Mapletree Logistics Trust and Mapletree Pan Asia Commercial Trust. The fundraising capability of data center REITs is evident.