Amrik Sangha, Partner, Gateley Legal LLP, Dubai, discusses the Middle East data centre market concerning sector development, facility management and collaborative support.
What trends have you observed in the data centre market over the last few years and how do you think this contributes to the development of the sector in the Middle East?
Data centres have historically been the domain of incumbent telecommunications companies. These companies managed one or two large-scale centres serving an entire jurisdiction and were the main contact for businesses wishing to lease data centre capabilities. This model is changing, as many businesses move to cloud services solutions with leading hyperscalers. Consequently, this has created the need for independent data centre developers who work closely alongside hyperscalers to provide purpose-built data centres away from the traditional colocation market.
As the hyperscalers are global, so too are the new data centre developers who specialise in the construction and management of data centres. Individual businesses continue to invest more in data centre leasing or colocation services, however, the main development across the GCC is the need to accommodate hyperscalers, who are going one step further by constructing purpose-built data centres in collaboration with independent, locally based developers.
While this is a global trend, the data centre sector in the Middle East is poised to grow exponentially. The data centre construction market, for example, is predicted to be worth US$4.39 billion by 2029, while the colocation market is expected to reach US$2.14 billion by 2028. These are conservative numbers considering no one has announced specific projects for AI-based data centres that require larger computing and power investments along with more complex designs for cooling racks.
This growth is driven, in part, by the development of cloud computing, particularly in the wake of the COVID-19 pandemic. Like those of other regions, the Middle East’s workforce has embraced remote working, and many governments in the region are currently implementing Digital Transformation strategies and smart city initiatives that support this, including Internet of Things (IoT), 5G and Machine Learning.
The need for greater local data centre capacity is further heightened due to the introduction of more stringent laws concerning data transfer and processing. Many companies are, as such, investing in data centre infrastructure that circumvents the need to process data in foreign jurisdictions such as the US or Ireland.
Environmental and sustainability targets provide further impetus for data centre construction in the Middle East. More countries in the region are recognising the importance of Environment, Social and Governance (ESG) credentials for securing investment. Data centres play a big part, with research from the International Energy Agency (IEA) suggesting that they could consume more than 1,000TWh by 2026 in a worst-case scenario. While new, more energy-efficient technologies are available, they are not easily installed into existing facilities, thus driving the need for new data centres capable of housing them.
Can you tell us how you work with data centre companies through each stage of the construction process, from planning and acquisition to managing the facility?
Our team in Dubai offers support to data centre developers, operators and hyperscalers, providing legal and business advice across the entire lifecycle of a data centre project and its operations, including placement of international personnel via our employment team.
This may include, for example, sourcing suitable land for the data centre, and crafting the correct agreements with landowners and utilities providers before development work begins. We advise on the correct zoning of land and applications to increase power and we negotiate with telecommunications companies for fibre.
During construction, we support clients in appointing the right local contractors and consultants using our network of existing contacts, and develop robust contracts and agreements to ensure that work is completed on time and to the required standard. We also ensure that the project continues to be properly financed via local debt providers and can offer legal opinions on a range of structures, including equity investments, shareholder loan arrangements, bilateral and syndicated lending facilities and security agreements.
Once a data centre is built, we support the client in making the most of the space by advising on market standards for colocation and leasing agreements. We also help with the day-to-day operation of the data centre by ensuring agreements with suppliers and facilities managers are effective, and by developing policies, procedures and legal guidance for employees based at the data centre.
How does Gateley help data centre operators and developers overcome compliance issues?
Through our deep understanding of the law in jurisdictions across the Middle East, we meet with local regulators to build the best possible business case for our clients and their data centre projects. Data centre developers, in particular, can face challenges in the initial stages when entering into leases or making applications to increase power from utilities.
In addition to navigating the legal requirements for land leases, Power Purchase Agreements and carrier agreements – which vary between jurisdictions – developers also need to ensure that they establish the right legal entity in their chosen jurisdiction, backed by senior management that can support the local presence, drive business and liaise with equity and debt partners within the region. We provide legal guidance in all these areas and can also set up meetings with government ministries for potential ICT-related matters.
What unique advantages do data centre operators enjoy in the region?
Over the last five years, data centres have become an increasingly critical and sensitive infrastructure for governments around the world, particularly in the Middle East. The region, however, is still behind its Western counterparts in the availability and use of data centres. Although, this presents an unprecedented opportunity for local and multinational developers to support the region in closing this gap.
Many governments are implementing favourable policies, such as special economic zones and tax incentives, for the data centre sector. In Saudi Arabia, for example, the Data Centre Services Regulations have been implemented to cultivate an environment that supports the growth of the data centre sector in the Kingdom by, amongst other things, creating a transparent and accessible framework for data centre operators.
The region also provides a highly strategic location for data centre operators looking for greater access to global markets, as well as greater opportunities to invest in renewable energy sources, particularly solar power.
How has the regulatory environment for greener operations helped data centre developments to thrive?
The Middle East is transitioning away from oil, with many jurisdictions now setting targets for energy from clean and sustainable sources. As such, there is increasing demand for data centres that are either retrofitted with or purpose-built for, new, greener and more energy-efficient capabilities.
The region benefits from abundant solar energy as a renewable source, but it also faces challenges concerning data centre cooling. Temperatures in the summer can reach up to 50°C, and hyperscalers and customers still require a sensible PUE level to operate equipment efficiently. This means developers and operators need to install robust cooling systems to ensure ambient temperatures inside the facilities are acceptable.
Liquid immersion cooling is one such technology that has huge promise in this area, absorbing and dissipating heat generated by IT components more than 20x more efficiently than traditional air-based cooling systems. Existing facilities cannot easily accommodate such systems, however, providing further opportunity for developers to explore the constructive of data centres that are purpose-built for liquid cooling with hyperscalers.
As government interest in energy efficiency grows, so too may incentives to invest in and use such technologies to reduce power requirements. Everyone agrees that more data centres are required but the key concern is how they can be powered and how global companies can reduce or control carbon emissions to meet global regulations.
What key factors are fuelling the demand for specialised legal and consultative services in the development and operation of data centre projects across the Middle East?
The key driving forces for specialised legal and consulting services are the data centre customers who want to deal with an experienced professional team that understands the sector and has an in-depth knowledge of the technical requirements and industry standards for developing and operating a data centre.
Many industry-specific issues need to be addressed in all documentation. This can be undertaken by an experienced team, which saves the customer from spending time learning the points that need to be addressed, and ultimately saves them time and money.
