Data centres – here today, here tomorrow: Middle East outlook

Ruth Harris:
Hello, and welcome to the next episode in Ashurst's podcast series on data centres, Here Today, Here Tomorrow. I'm Ruth Harris, a finance partner specialising in data centre financing. I'm based in London and I lead our global data centre group. I'm joined today by Simon Rahimzada, head of corporate transactions in the Middle East, and Vasi Papadopoulos, a partner in our Middle East practise and one of our tech specialists.

Simon and Vasi, you've had lots of experience in the Middle East over the past 17 years, I think Simon for you, 10 years for you now Vasi. You know the market and the regulatory landscape extremely well. Just recently, at our data centre seminar in London, one of the key takeaways was the importance of the Middle East when looking at global data centre investment. I'm really looking forward to unpacking this with both of you in this podcast.

Simon and Vasi, you serve our Middle East practise across our hub offices based in Riyadh, Dubai, Abu Dhabi, and Jeddah, so have a really good view of what's happening there. Let's start with the bigger picture. What are you seeing in the data centre industry in the Middle East at the moment?

Simon Rahimzada:
Thanks, Ruth. As you mentioned, the Middle East has emerged as a global hotspot for data centre development. Similar to what we are seeing in other markets, data centres are a key focus and it's one of the most rapidly evolving sectors in the Middle East. Over the past decade, the region has witnessed a surge in demand for digital infrastructure driven by rapid digital transformation, the proliferation of cloud services, and the increasing adoption of technologies like AI, IOT, and 5G.

Ruth:
Sure. That all makes perfect sense, sounds familiar across the jurisdictions. And you particularly had rapid urbanisation, population growth. Everyone's got their smartphones, lots of gamers. But on top of this, you just mentioned on top of that local requirement, there is this race to championing AI. I just wonder if you could talk a little bit about how much that features in the UAE and the wider GCC. Maybe Vasi, do you have a view on that?

Vasi Papadopoulos:
Yes, of course. Thanks, Ruth. Look, the importance of AI in this market and the focus of it for governments and also investors can't be understated. We're seeing tremendous investment into AI and really to tech by clients in the region. We're also seeing new entities and players being set up specifically with a mandate to encourage the investment in AI, research into AI of course, and also the use of AI. For example, on the latter, we have clients who are actively looking at ways to incorporate AI into their own system. It's not just about investing in it, but also about using it. They're also turning to us and asking us more and more what forms of AI we use or can use, and are showing an increased interest in the space.

Another factor that's coupled with AI and data centres in particular is the increase in data residency and privacy requirements. There's both governmental data sovereignty rules and regulations, but we also see a lot of clients particularly in the government sector developing their own internal data residency frameworks which sit on top of what the government prescribes.

That's encouraged the GCC countries, in particular the UAE, Saudi Arabia, but also Qatar, Bahrain, Kuwait, and Oman to really lead the charge and heavily invest in data centres. The UAE for example, just to single out the UAE and Saudi who are leading on this in particular. The UAE's really invested in positioning itself as a digital hub, with both Dubai and Abu Dhabi, and attracting major investments from international cloud providers. Saudi Arabia of course has its Vision 2030 initiative, with one of the focuses being investments in digital infrastructure. That's really aimed to diversify the economy way from just oil and becoming a regional tech powerhouse.

Ruth:
Thanks, Vasi. How big are we talking? Give us some numbers as to how big the market is.

Simon:
Yeah. I suppose numbers tell the story. A recent report suggested that data centre capacity will triple in the next five years in the Middle East, from one gigawatt to over 3.3 gigawatts. Some sources reference even more ambitious numbers, so we're talking large sums here.

New facilities are also being announced almost monthly in hyperscaled data centres. So those massive facilities that power the world's largest cloud platforms are becoming increasingly common. Of course, it remains to be seen to what extent these announcements materialise and at what speed, but there is certainly a lot of momentum across the Middle East in this particular sector and we see that likely to be growing astronomically I think over the next few years.

Ruth:
I can agree with that. The recent Data Cloud conference down in Cannes, there was a lot of talk about the Middle East. It is difficult to know what momentum there is. Across Europe, across the US, it's difficult to decipher what is aspirational announcements and what actually counts as megawatts with planning, with permitting, and then megawatts under construction on energised land. It's difficult to decipher that, but certainly all the evidence is huge momentum and a huge growth in demand, and therefore supply will follow that.

But maybe just talking a little bit about what is fueling this growth. Vasi, what do you think is behind this growth?

Vasi:
We already spoke about AI and the general growth in demand. I think, Ruth, you mentioned earlier the massive population increase as well, which of course only adds to that demand. That's of course both huge factors in the growth and the interest in developing the sector.

Another aspect that's really helped build the momentum is the proactive position or proactive attitude of the governments in the region. You've seen Saudi's Vision 23 which we briefly spoke about. But also, other governments like the UAE having a strong focus in investing in digital infrastructure and becoming leaders in this space. That, of course, having the governments behind it and really looking to grow the sectors and putting frameworks around that support, that builds investor confidence. It means that it attracts investors who might not have previously looked at the Middle East as a jurisdiction of interest who are now turning to us. And also, seeing the interest in AI, seeing the interest in data centre, and really seeing it as a source of opportunities.

Also, having the government behind you, and having government backing, and this being a key focus does mean that speed to make for data centres in the region could be quicker than in other jurisdictions. I think one of the issues we touched on in other episodes is speed to market and approvals taking several years to obtain. Which, where you've got governments behind the need to develop the infrastructure and prioritising it, could be quicker in the Middle East.

Ruth:
Yeah. Speed to market, absolutely key. How much backing do you have from the governments incentive wise, regulation wise? Is there any momentum there from governance, any incentives?

Simon:
Yeah. As Vasi mentioned, I think the GC governments are committed to facilitating this growth. This includes introduction of regulatory reforms to attract investment and encourage innovation. I think most GCC states have been really good at that. Not just within data centres, but across all industries of focus for the government, and data centres are certainly one of them as an extension of some of the other sectors that they're focusing on like energy and tech, and various other similar areas. Particularly if you look at the Saudi and the UAE, they've obviously pushed and made lots of different regulatory reforms to encourage the development of those sectors, and also investment into those sectors.

I suppose aside from the relaxation of foreign ownership restrictions across many sectors including tech, which happened several years ago, we're also seeing key regulatory reforms around data protection and privacy laws to align them with global standards I'd say. I suppose the lifting of the foreign ownership rules happening earlier in Saudi Arabia, it's happened more recently in the UAE, has given international investors a lot more comfort to move into the Middle East, to the GCC in particular. To own their assets in the GCC, and also I suppose to bring the technology into the GCC and the know-how, which is effectively what most GCC states are trying to encourage for growth.

ESG is also becoming a focus. I think there are a lot of entities, both in UAE, Saudi, Kuwait, Qatar, across the GC that are becoming even more focused around ESG matters. We saw very recently one of the Abu Dhabi entities that's focused on data centres, Khazna, has come out with a number of data centre initiatives which are heavily focused around ensuring that ESG targets are met and continue to be met. Which also, I suppose, assists in attracting international investors to come into the market, when the governments in the UAE and the NCs demonstrate that same focus as well. Again, aligning it with the interests of entities in Europe and more wider internationally. I suppose this provides greater clarity and confidence for investors, as I said, as well as customers who've got I suppose ESG as a driver in their decisions when investing in a region or just living in a region.

Ruth:
Yeah. I think that's really interesting how ESG requirements of investors means that actually that incentive and that imperative is actually spread much more broadly. It must be a challenge, mustn't it, in Saudi and in Dubai, across the UAE, the climate is against you in that regard. We hear a lot of talk about another growth area being the Nordics, and obviously they have the climate much to their advantage. Looking for ways to tackle that challenge I suppose is key in your area.

Let's move onto who are we seeing. Who are the international players that Vasi mentioned that are coming into the region? Who's in the space?

Simon:
We're looking at, at the moment, global tech giants like Microsoft, Amazon Web Services have all been here for several years and they continue to announce major investments in the region, building their own data centres and partnering with local firms. We're expecting them to remain key players across the region.

In addition to these traditional tech players, we're also seeing interest from private equity and infrastructure funds from Europe, the US, including the likes of Equinox. In addition to bringing capital, these investments allow for the import of cutting-edge technology and best practises, again as I mentioned earlier, further strengthening the region's digital economy ecosystem. And also, aligning with the GCC's interest to bring [inaudible 00:12:55] and tech into the region as well.

But it isn't just about the international players. We've got regional investors that are doubling-down on their home turf. Local telecom giants like e&, formerly Etisalat in the UAE, and STC in Saudi Arabia. You've also got real estate developers, some regional private equity firms. Some names that you might have heard of in this space across the region include G42, I mentioned earlier Khazna, and there's Gulf Data Hub to name just a few. G42, for example, very recently announced plans for a five gigawatt data centre campus which will accommodate tech players such as OpenAI, which is great for the region.

Ruth:
Oh, that's great news. I suppose it's not just about meeting the local demand, there's a bit more of a wider geographical, political play if you like to position the area, the region as a global data centre hub. Is that what you're seeing? Serving customers more broadly, more widely across the globe.

VasiI:
Yes, exactly. To make the point, this isn't necessarily just in the data centre space. We have seen over the last years, GCC entities and clients going out and proactively investing in businesses around the globe, and also widening their geographic footprint. That's really everywhere from the US to Asia. But data centres is of course a key focus, and that is also around building out the region as a global data hub, and also becoming key players on the global stage.

Just to give a few examples. Both the Abu Dhabi Investment Authority and Saudi Arabia's PIF, the Public Investment Fund, have participated in multi-billion dollar deals involving data centre assets worldwide and they're continuing to show interest in this space. That's really part of the broader strategy of diversifying their portfolios, and also gaining exposure to fast-growing digital economies and the global market.

We're also seeing more GCC players that aren't necessarily the sovereign wealth funds, but the corporates as well, expanding internationally. A lot of the advice we actually provide in the data centre space globally out of this office is to Middle Eastern clients looking to explore data centre opportunities worldwide. Again, that is really global. We've looked at Brazil, Columbia, all the way to South Korea, which is actually quite a focus area at the moment, to everything in between including India, Egypt, Turkey, and Kenya. I know that Rebecca Clark in one of the earlier podcasts highlighted some of the untapped markets for data centre investments, including Africa. It's not surprising that our clients are also looking at Africa, Kenya, et cetera, as geographies of interest.

Another trend we are seeing, at least from investors in this region, is that although they were previously looking at brownfield investments and investing in established data centre projects, they are now exploring more greenfield investments, often in the form of joint ventures.

Ruth:
Yeah, we're seeing that across Europe as well. I think because there's this requirement for speed to market, it requires JVs and collaboration across the whole supply chain. I think we mentioned in one of our previous podcasts that we'd worked with TRITECHs in their JV with utility provider. I know, Simon, you've had some experience in this space as well.

Simon:
Yeah, JVs are becoming really important in the space. In fact, JVs across the GCC have always been important for the local players, as well as I supposed internationals who need the local know-how and experience to bring their technology and operate their underlying businesses. Rather than going through it independently, and not knowing the market or not knowing the region very well. Joint ventures have served multiple purposes for investments across the GCC for decades now. I think this is obviously extremely important for data centres as well. One of our other partners, Chris Grey, spoke about the importance of joint ventures in an earlier podcast. I think they're important for the regional data centre projects being pursued by GCC players, and also the international ones.

I think with the change in legislation across the GCC over recent years, it's making structuring JVs a lot more straightforward. People are able to create enforceable shareholding arrangements across both Saudi Arabia, the UAE, Kuwait, Qatar, Bahrain a lot better than they have ever done before which gives international companies a lot of comfort when they're investing in the region.

The UAE has created lots of free zones that have laws which are akin to English law. It always sounds a bit odd to most people, but they have legislation within these free zones that match English law principles. It makes shareholding arrangements and joint venture agreements a lot better from an enforceability perspective to ensure those rights that you hardly negotiated remain enforceable in the back end of a JV. The landscape is quite nicely geared up in the Middle East to allow a lot for JV and for international investors to come in and joint venture and partner with local investors.

Ruth:
It all sounds too good to be true. There's the demand there, you've got all the money, the collaborations there. It's really refreshing actually to have a podcast that hasn't gone in immediately to talk about the challenges, such as I don't know, power, connectivity, land. Maybe we should, before we finish this podcast, actually talk about any challenges in the GCC and wider area. Vasi, what are you seeing from a land, power, connectivity point of view? Are there any challenges there?

Vasi:
Yeah. Look, I think similar to other jurisdictions, there are challenges in the UAE. We probably see similar challenges to other markets, so building the necessary infrastructure is definitely one of them. There's a lot of land and ambition to develop, but the infrastructure and supporting environment does need to be there.

On land specifically, one of the issues that we see investors trying to address and deal with in various way is the foreign ownership restrictions that still exist across the GCC when it comes to land ownership. If you're a foreign investor looking to come into the UAE and build a data centre onshore where foreign ownership isn't permitted, then that means you won't be able to own the underlying land or real estate. You need to think about structures and the contractual frameworks that will allow you to protect your investment. We do a lot of advising in that space.

This is also why joint ventures, for example, are some important because everybody does bring their strength to the table and their capabilities. You'll have the international expertise and the key data centre players coming in and sharing their know-how. Then you have the local element, the access to the land, but also the knowledge of the laws and the framework that really help bridge any risks that you might otherwise have.

Ruth:
Yeah, that's really interesting to hear. And as a firm, of course, we've got the track record of supporting these large scale infrastructure projects and supporting them when they're a JV network as well. All great news. Simon, anything to add on that?

Simon:
Yeah. As Vasi mentioned, infrastructure is absolutely key to these data centres. The Middle East is ... Well actually, I'll tell you, the GCC is considerably hotter than most jurisdictions, for anybody whose been out here. Investment in cooling technologies is also important. The nice thing, I suppose, about the GCC now versus maybe 20, 30, 40 years ago is that countries across the GCC have got a lot better at developing cooling technologies. Some people who might have come out here might even experience outdoor AC areas as well. The GCC does it really well, so it's able to cope with the rising temperatures during the summer periods and ensuring data centres are appropriately cooled.

It will also, I suppose, be interesting to see how liquid cooled solutions for data centres will be adopted in the Middle East. I know that there's talk of it. The UAE has got a really good track record of developing facilities that provide district cooling capabilities to residential and commercial real estate projects across region. Which can be a challenge in some other places that don't actually have those technologies or haven't actually experienced the same rising temperatures as the GCC has, so it's well advanced from that perspective. Liquid cooled solutions for data centres would be another area to watch out for a little bit more closely as the data centre industry develops across the region. The infrastructure is all there, which is great.

Another aspect is to consider the financing of these projects. A lot of data centre projects, as well as various other projects in the region, often are financed from third party lenders. You might see project financing type structures out here. The GCC also has a number of investors out here that have Sharia considerations, so therefore Sharia financing structures are often quite common in projects in the region. Not absolutely necessary, not everybody wants to be Sharia compliant. Some do, or some entities do. It's always worth identifying whether your particular counterpart has any Sharia considerations or restrictions that should be factored into the overall financing of a data centre project. A lot of that depends, as I said, on the stakeholders involved in the overall project. But again, the nice thing is project financing and project finance structures are all very well-developed across the region and are pretty cookie-cutter these days.

Vasi:
Yeah. This is really the great thing about data centre projects and I think something that we get quite excited about, is it is a full service aspect. There's loads of room to collaborate. We touched on the joint venture, Simon touched on the structuring and where to set up entities. That's where we feed in on the corporate side. Then of course, Ruth, you and your team would feed in on the financing side, including the Sharia elements that Simon discussed. We've got our regulatory team plugged in. We've got real estate, tax. It really is an all hands on deck and requires tremendous effort from experts across the firm. If you have done data centre transactions, you see the massive piles and piles of documents involved and complexity. It really does show the areas of expertise that are needed to get one of these projects off the ground. I think for us personally, that's been quite an exciting aspect of working on these deals because we really do get exposed to so many different areas.

Ruth:
I absolutely agree. It's a great area isn't it, Vasi, Simon, for the curious. It's fast moving, there's always something new that you can learn. Collaboration is so key, so it's a fun industry to be in. But I'm afraid that is all we have time for today.

Remember if you're new to the data centre industry and you found some of the terminology baffling or just want to know more, please do get in touch to speak to one of our specialists who can share with you our jargon busters, they are regularly updated. Maybe share with you our themes for trackers across the offices. Or even visit ashurst.com and have a look on our hub there, our data centre hub there to get more information. If you'd like to find out more about the issues raised across all of our legal outlook series, please do feel free to get in touch. Just visit ashurst.com and don't miss out on any future episodes.

That's it from me today. Thank you very much to Simon and Vasi. Thanks very much to all of you for listening. Goodbye for now.