Hong Kong’s Data Center Sector: Industry and Regulatory Landscape
The Hong Kong data center market is expected to witness strong growth over the next decade as demand for computing power and cloud services grows with the city’s continued digitization. The unique geographic, economic, and regulatory advantages of the region make it an attractive destination for developers and investors. In this article, we provide an overview of Hong Kong’s data center market, including land, talent, and infrastructure resources, and discuss regulatory requirements for the industry.
The Hong Kong data center industry was ranked second in Asia and fourth in the world in Cushman & Wakefield’s 2023 Global Data Center Market Comparison report, citing a range of metrics, including a strong ecosystem, excellent connectivity, consistent demand, and comprehensive availability of cloud services.
As one of Asia’s largest financial hubs and a city with a vibrant business environment, Hong Kong has a huge demand for computing power.
Due to its proximity and close integration with cities on the Chinese mainland, the Hong Kong data center industry is also known as a “gateway” to serving customers in the mainland Chinese market, as foreign players in the space can take advantage of Hong Kong’s looser rules on foreign investment.
As the city sets eyes on developing the technology and digital sectors, and high-tech applications, such as artificial intelligence in particular, the demand for computing capacity will only continue to grow.
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Overview of the Hong Kong data center market
Hong Kong’s data center market is estimated to be valued at around US$3.03 billion in 2023 and is projected to reach US$5.65 billion by 2028, reaching a CAGR of 13.25 percent from 2023 to 2028.
Overview of the Hong Kong Data Center Market
Market size: US$3.03 billion (2023)
Projected growth: US$5.65 billion (2028)
Projected capacity: 1092.3 MW (tier 4 data centers) (2029)
CAGR (US$) (2023 – 2028): 13.25%
IT load capacity: 330.3 MW (tier 4 data centers) (2022)
Number of data centers (2022): 60
Data center area (2022): approx. 800,000
Major providers: China Mobile (China), Global Switch Holdings (China), HostDime (US), NTT (Japan), Zenlayer (US)
Locations Kowloon: Tseun Wan, Kwai Tsing, Kowloon Bay, Shatin, Tai Po, Tseung Kwan O; Hong Kong Island: Hong Kong Central, Aberdeen, Chai Wan
Source: Hong Kong Data Center Market Size & Share Analysis – Growth Trends & Forecasts (2023 – 2028), Mordor Intelligence; Office of the Government Chief Information Officer, Government of Hong Kong; Research Office of the Legislative Council Secretariat
As of 2022, Hong Kong had around 60 data centers covering a total of 800,000 square meters of floor space. This includes around 55 colocation data centers. The data centers are mainly spread over the districts of Tsuen Wan, Kwai Tsing, Shatin, Tseung Kwan O, and Chai Wan, among others.
Given the huge potential of data centers in Hong Kong, the industry is expected to attract a large amount of investment over the coming years. According to research from Arizton, the industry will attract US$4.18 billion between 2023 and 2028.
Location and connectivity
Hong Kong has emerged as an ideal location for establishing data centers, due to favorable factors, such as a low prevalence of natural disasters, a reliable electricity grid, stable electricity prices, and a highly developed IT infrastructure. Cushman & Wakefield mention Hong Kong as among the cities studied with the lowest earthquake risks worldwide.
Its proximity and deep integration with the Chinese mainland, in particular the vibrant Guangdong-Hong Kong-Macao Greater Bay Area (GBA), enables connectivity with the mainland’s expanding IT infrastructure and data center market.
Hong Kong is already home to a robust network of telecommunications and IT infrastructure that is ideal for the establishment of data centers. The Cushman & Wakefield 2023 Global Data Center Market Comparison report lists Hong Kong as one of the world’s top locations for fiber connectivity, and the Speedtest Global Index ranked Hong Kong’s fixed broadband speed as second in the world in July 2023.
As of March 2022, Hong Kong had 12 submarine cable systems and eight submarine cable landing stations, with several more under construction.
Hong Kong is home to a highly skilled and growing IT talent pool. As of April 2022, IT employees accounted for almost 3 percent of the total workforce, with a total of 112,425 IT employees, including freelancers. Among them, around 33.6 percent worked in software development and 27.7 percent in infrastructure and operation support.
The number of IT employees in Hong Kong has steadily risen by 17.4 percent since April 2018 and by 81 percent since March 2004.
Salaries for IT workers remain relatively competitive in Hong Kong, with most general IT managers earning over HK$50,000 (approx. US$6,375) a month. The median monthly income between May and June 2022 was HK$19,100 (approx. US$2,435).
However, salaries for IT employees working in infrastructure and operations support are considerably lower, with 85.6 percent earning less than HK$30,000 (approx. US$3,825) per month and 44.3 percent earning less than HK$20,000 (approx. US$2,550).
Expectations for IT employees’ educational and experience levels are also relatively high in Hong Kong. As of 2022, 43.5 percent of IT job posts prefer employees to hold at least a first degree, with many more preferring a sub-degree or a post-graduate degree. For infrastructure and operations positions, which have some of the lowest preferences for educational level, only 13.9 percent of positions preferred candidates to have only secondary education (high school) or below, with 55.3 percent preferring at least a relevant certificate or diploma.
Land scarcity is one of the major challenges to the expansion of Hong Kong’s data center market. Due to the small overall land area, mountainous terrain, and high demand, Hong Kong has limited supply and some of the highest prices for industrial land in the world. As demand for data center capacity continues to grow, so will the prices and competition for land.
However, the limited land supply and high prices do not appear to have dissuaded developers and investors, with several major land sales for the development of data centers having gone through in recent years.
In addition to the geographical, demand, and infrastructure benefits of situating data centers in Hong Kong, the 2023 Cushman & Wakefield report also noted that Hong Kong’s favorable business tax structure may also serve to mitigate the high land prices.
Over the last decade, the government has implemented several measures to improve the supply of land for data centers. These include waiving fees for converting parts of eligible industrial buildings, accepting lease modifications for redeveloping industrial lots into high-tier data centers, and the sale of greenfield sites from the government.
One of the major contributors of land to data centers is the InnoParks of the Hong Kong Science and Technology Parks Corporation, which has supplied around 48 percent of land for data center development as of 2022.
According to the Research Office of Hong Kong’s Legislative Council Secretariat, the government is also considering reclaiming land for the development of data centers in the Northern Metropolis, an economic planning area in the New Territories.
Hong Kong data center market segments
Financial services and banking
As one of Hong Kong’s most central industries, Hong Kong’s data center market caters extensively to the financial services industry. High-frequency trading, secure data storage, and low-latency connectivity are crucial for financial institutions. Data centers in this segment prioritize robust security measures, redundancy, and high-speed connectivity to serve the demands of banks, asset managers, and financial technology (FinTech) companies.
Managed service providers and cloud computing
Managed Service Providers (MSPs) in Hong Kong are playing an increasingly vital role in the city’s dynamic business landscape. These companies offer a range of IT services, from cloud computing and cybersecurity to network management and data analytics, allowing companies to outsource their data center needs.
There are already several MSPs active in Hong Kong, such as CITIC Telecom CPC, PCCW Global, and HGC Global Communications.
Hong Kong is home to a mature cloud computing sector, which still has huge growth potential for growth as business, government, and the broader society continue to digitize.
The demand for cloud computing services has already grown exponentially over the last decade. According to data from Hong Kong’s Legislative Council Secretariat, the proportion of Hong Kong businesses using cloud computing services jumped from just 7 percent in 2013 to 95.2 percent in 2021.
Moreover, a research report from Arizton projects that over 50 percent of future demand for data centers will come from cloud service providers. This will mean that on-premise data centers for individual companies will decline, while colocation and cloud data centers will increase, along with the companies that provide related services and solutions.
Hong Kong already has a relatively saturated cloud market with several large active domestic and international players, most notably AWS, Google Cloud, Microsoft Azure, and Tencent Cloud.
Energy efficiency enhancement
Data centers are extremely energy intensive, and the development of the market therefore runs counter to Hong Kong’s goal of achieving carbon neutrality by 2050.
According to research conducted by the Legislative Council Secretariat, the energy consumption of data centers jumped from 4,063 terajoules in 2018 to 5,343 in 2020, an increase of 31.5 percent. This was despite overall energy use in the economy declining over the same period.
With the continued expansion of the data center industry, energy consumption is expected to increase substantially, even if significant energy conservation measures are taken. Energy consumption is also expected to increase due to the adoption of high-density services, which due to high levels of energy consumption and heat generation require more power for cooling. The increase in energy consumption is not only a concern for the reduction of carbon emissions but also for the cost of operations for the developers and suppliers.
According to the Office of the Government Chief Information Office (OGCIO), various industry stakeholders, including governments, industry bodies, and technology vendors, are actively collaborating to develop and promote best practices and technologies for energy-efficient data centers. In Hong Kong, the government has set up the Energy Efficiency Office to promote energy conservation, with measures like the Building Energy Efficiency Ordinance (BEEO) and the Fresh Water Cooling Towers Scheme aimed at enhancing energy efficiency in data centers.
The OGCIO has also implemented a series of green computing initiatives, such as the development of the Green Data Centres Practice Guide. This guide “aims to provide the best practices […] to assist data center industry practitioners in identifying and implementing measures to improve the energy efficiency and environmental performance of their data centers”.
Meanwhile, the Hong Kong government has been actively building out the region’s renewable energy capacity through renewable energy projects. Through these efforts, it strives to increase the share of renewable energy in the fuel mix for electricity generation from 7.5 to 10 percent by 2035. Increasing the share of renewable energy in the grid will also help to reduce the carbon emissions and costs of operating data centers.
Regulations, market access, and tax policies for Hong Kong data center operations
Hong Kong places no additional restrictions on foreign investment or ownership in data centers or related services. This makes the market in Hong Kong much more accessible than that of the Chinese mainland.
Low tax environment
Hong Kong’s low tax environment significantly reduces costs that data center developers may experience in other markets.
Some key tax advantages in Hong Kong include:
- Low profits tax: Hong Kong imposes a low and competitive profit tax rate on corporations, capped at 16.5 percent. Data center operators can benefit from this favorable tax rate, which helps maximize profitability.
- No indirect tax: Hong Kong does not impose value-added tax (VAT) or goods and services tax (GST), making it a cost-effective location for data centers to set up as the cost of key services and components required is substantially reduced.
- Tax exemptions and deductions for capital expenses: Hong Kong offers various deductions and allowances for capital expenses related to business operations, which include data center construction and equipment. This includes tax depreciation of fixed assets and deductions of R&D expenses.
- Double taxation agreements (DTAs): Hong Kong has an extensive network of DTAs, which help to reduce the risk of double taxation for operators from countries that have entered into a DTA with Hong Kong.
- No withholding tax: There is no withholding tax on dividends, interest, or royalties paid from Hong Kong, making it an attractive location for multinational companies.
Land allocation and leasing
The construction of data centers is subject to certain licensing and planning restrictions. For instance, data centers can only be built on land that has been permitted for this use under the city’s Outline Zoning Plans (OZP).
In addition, the construction of a data center may involve seeking planning permission or building plan approval. Data centers will also be subject to various laws, such as the Building (Planning) Regulations, the Town Planning Ordinance, and the Buildings Energy Efficiency Ordinance (BEEO).
As mentioned previously, the Hong Kong government has imposed several concessionary measures to increase the supply of land for the development of data centers.
There are currently three main ways for companies to obtain land for data centers:
- Conversion of existing industrial buildings;
- Purchase of greenfield sites from the government; and
- Purchase or renting of sites or building space on the open market.
For the conversion of existing industrial buildings, the Lands Department implements streamlined procedures for processing applications from owners of industrial premises for the issue of waivers to facilitate the establishment of data centers in the premises.
Available greenfield sites for sale are updated by the Lands Department and listed on its Land Sale Programme landing page. Only sites listed as “commercial”, “industrial”, and “mixed-use”, among other use scenarios, are permitted for the construction of data centers.
China Briefing is written and produced by Dezan Shira & Associates. The practice assists foreign investors into China and has done so since 1992 through offices in Beijing, Tianjin, Dalian, Qingdao, Shanghai, Hangzhou, Ningbo, Suzhou, Guangzhou, Dongguan, Zhongshan, Shenzhen, and Hong Kong. Please contact the firm for assistance in China at email@example.com.
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