INSIGHT

Linklaters Insights: Booming foreign investment in data centres faces regulatory heat

By Jeremy Low
Banking Financing Foreign Investment Review Board (FIRB) Technology

Soaring demand for assets – despite clear FI concerns 3 min read

Data centres, the warehouses underpinning the digital aspects of our working and home lives, have become red hot assets, with investors piling into the sector – and regulators in the West are signalling their readiness to closely scrutinise foreign investment (FI).

This special mini-series of blog posts by our global alliance partner, Linklaters, takes a deep dive into the distinctive positions taken in jurisdictions across the globe for this hot asset class and offer some practical tips for investors facing FI reviews.

In this post co-authored by Allens Partner Jeremy Low, the team delves into the distinctive approaches taken by authorities in Australia (which in some ways goes beyond even the European approach), and Asia (where authorities have very different pro-investment policy priorities).

Key takeaways - Australia

  • Attracted by compelling infrastructure-like returns, investors have been piling into Australian data centres.
  • Investors are also keen on greenfield projects, with a number of sites being marketed as data centre 'ready' (ie via development approvals, connections etc).
  • Investors’ growing interest in data centres is, however, matched by that of Australia’s Foreign Investment Review Board (FIRB). FIRB’s guidance leaves little doubt as to its intentions to pay close scrutiny to foreign investments in relation to this asset class – stressing that '[d]ata centres and cloud providers are critical to maintaining the supply and availability of data and cloud services in Australia'. Notably, FIRB raises concerns that go well beyond ensuring business continuity and its guidance flags that data centres hold sensitive data and personal information that can be 'a target for espionage, sabotage and foreign interference activity.'
  • It is increasingly complex to assess whether acquiring investors need to obtain FIRB approval. The sensitivity of the area, unhelpfully for investors, means there is very little public guidance and investors need to rely on well versed practitioners experienced in FIRB practice.
  • It is expected that additional types of data centres will be caught by a proposed expansion to the scope of assets subject to FIRB review – even when government data isn’t stored in the data centre at hand. Data centres caught by these changes will not only be subject to mandatory filings with FIRB but also to ongoing regulatory supervision by the Critical Infrastructure Centre, which in practice usually involves ongoing reporting and notification requirements.

Key takeaways - Asia

  • As in other countries, intra-Asia competition for data centre capacity has intensified for key assets located in Singapore, Hong Kong SAR, mainland China, Japan and Korea.
  • Yet in contrast to the approach generally taken in Western countries, governments across the region have traditionally sought to incentivise unhindered inward investment and growth in the sector.
  • While M&A does not generally trigger significant FI issues in the region, certain transactions may require pre-closing FI approvals (eg in Taiwan or India) depending on the nationality of the acquirer. And the situation is evolving in relation to the regulation of existing operations in some countries.
  • This hasn't slowed down investments though, and we have seen market players in the region entering new markets.
  • All in all, while data centres may be a hot market globally, it’s clear that investors can expect a warmer welcome in some places than others.

For more detail, read the full post here.