Keppel DC REIT: How Each Data Centre Differs, and Why it Matters

Keppel DC REIT (SGX: AJBU) was listed back in December 2014.

At its initial public offering (IPO), units of Keppel DC REIT were offered at S$0.93 apiece. The REIT closed trading at a unit price of S$1.43 on 11 December 2017, providing its early investors a total return of over 75% since its IPO (including dividends). As Foolish investors, we want to look beyond the stock price movement to understand the underlying business.

And for that, we can turn to Keppel DC REIT’s IPO prospectus. The document contains a wealth of information on the REIT’s business and market.

Cost matters

Yesterday, we took a look at a typical cost structure for a data centre. While the cost structure provides a guideline, technical requirements for data centres differ greatly from one centre to another.

For more details, we can refer to a market research report prepared by BroadMedia Consulting (BMC), a group that was commissioned by the REIT’s manager to research on its industry.

According to BMC, data centres can be ranked according to their service availability. The research group cited the tier ratings by the Uptime Institute as part of its report:

Source: Keppel DC REIT IPO prospectus

In summary, data centres can measured by its number of failures per year, and the number of hours for maintenance and unplanned outages. Furthermore, BMC points out that a key requirement for data centres is high reliability:

“One important aspect of the tiering system is that it illustrates the extremely high reliability expected of a data centre.”

In the tier system above, the average service availability for a basic tier I data centre is almost 99.7%. Tier IV data centres has the highest requirements whereby no failure or removal of any single component should affect the overall operations of the servers.  

Now, that’s all interesting. But, why do these tier rankings really matter?

Well, for one, the cost of a tier II and tier IV data centre can differ significantly. According to BMC:  

“For example, the cost of building and fitting-out a Tier IV data centre can be twice as much as a Tier II data centre and around 20-40% more than a Tier III data centre.”

Cost is part of the reason why tier IV are relatively rare. In fact, BMC noted:

“Tier III has become the de facto standard for users requiring high quality data centre space that can provide the level of reliability required to store and run their mission-critical data and processes.”

The final word

To be sure, the tier ranking system is not always adopted. BMC also noted that the specifications for data centres are not regulated. Therefore, the specifications tend to be geared towards the specific customer:

“Given the non-regulatory nature of tiering standards and the lack of official approval authorities, the design of a data centre is generally determined by the commercial arrangement between the data centre owner / provider and its customers, which tend to be unique to the needs of the specific customers rather than by relying on any particular tiering standard.”   

Hang on for more on Keppel DC REIT in the coming days.  

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The information provided is for general information purposes only and is not intended to be personalised investment or financial advice. Motley Fool Singapore writer Chin Hui Leong doesn’t own shares in any companies mentioned.