[AIDC Investment Strategies] "Korean Data Center Supply Shortfall... Ample Equity Investment Opportunities for Institutions"

Hwawoo Alternative Investment PG Team
Sought After by Both Domestic Institutions and Overseas Private Equity
"Legal Advisory Is Essential for Addressing Contract Risks"

"In the past, data centers were concentrated mainly in Japan, where the power infrastructure and related resources were strong. Now, as Korea ranks third globally in both artificial intelligence (AI) and AI data center sectors, it is sufficiently attractive and has the necessary infrastructure to draw hyperscalers. As a result, investment has become very active."

Youngwoo Park, partner attorney at the Alternative Investment Practice Group (PG) of Hwawoo Law Firm, projected that the domestic supply of AI data centers will remain extremely limited compared to demand, and the investment demand for such centers will keep rising over the next five years. However, he cautioned that investors should be mindful of contract risks with hyperscalers and local community complaints, advising thorough legal review and due diligence as essential measures.

Lawyers Daesagong (from left), Youngwoo Park, and Jiwon Kwak from Hwawoo Law Firm are posing. Photo by Dongju Yoon

Trending Investments: AI Data Centers in Korea

There are two main ways for institutional investors to invest in AI data centers being built in Korea. The first is an acquisition-style investment, where shares of already completed data centers are acquired. This approach offers a medium-risk, medium-return structure, as stable cash flow can be expected when tenants are already secured. In contrast, the development-type investment involves participating throughout the entire process, from land acquisition to design, construction, and securing tenants. This method is higher risk in the early stages but allows for high-priced exits after completion, resulting in a high-risk, high-return structure. Currently, the dominant trend is development-type investment, and the involvement of foreign investors is especially notable. Partner attorney Daesagong noted, "Recently, most advisory cases have been development-type investments, with considerable participation not only from Korean but also from overseas investors." The strengths of domestic AI data center investment, as highlighted by the legal team, are robust power and water infrastructure. Attorney Sagoong emphasized that, except in cases of physical phenomena, Korea Electric Power Corporation ensures a stable supply of electricity. He commented, "By maintaining transmission line capacities at half, stability has been secured, and this is assessed positively by foreign investors." In fact, Hwawoo Law Firm recently advised on a case in which a Singaporean private equity fund and a domestic listed company formed a joint venture (JV) in Korea. Several special purpose companies (SPCs) were established to facilitate asset-transfer-based investment, with participation from the development stage.

The ‘heat’ of AI data center development is spreading to regional areas as well. Investors still most prefer data centers in Seoul, Gyeonggi, and the greater capital area, as not only infrastructure but also maintenance and operations (O&M) personnel are concentrated there. But as power shortages have effectively made new construction in Seoul impossible, demand for development is now being dispersed to suburban and regional areas. A notable example is a Singaporean fund making a minority equity investment in an AI data center in Pohang, Gyeongsangbuk-do. Jiwon Kwak, senior foreign attorney, explained that in regional areas, the types of AI data centers are diversifying according to use—for backup, training, and so on. Thus, regional locations can definitely be suitable sites for data centers. Especially in the case of AI training data centers, data latency is not a critical issue, so distances between regions are less relevant. This means there is ample potential for new demand beyond the capital area.

Are There Investment Risks? Contract Considerations

For institutional investors pursuing development-type investments, it is crucial to secure end users. Failure to attract tenants, such as hyperscalers including U.S. companies like Microsoft, can lead to vacancies and even investment failure.

After tenants are secured, a subtle power dynamic emerges between lessors and lessees. In traditional data center development, developers or lessors usually held the upper hand, but in the case of AI data centers, tenants such as hyperscalers become the dominant party. To prevent vacancies and ensure long-term revenue, attracting these tenants is essential, often requiring investors to fully accommodate end user demands. Attorney Kwak stated, "Hyperscalers will often bring their own standard contracts and demand unconditional acceptance." They also insist on contract structures favoring tenants, such as a Non-Disturbance Agreement (NDA) that ensures their occupancy even in the case of a change in control or disputes.

For example, a contract might include a provision allowing a hyperscaler to refuse to pay rent if the unit price for AI computation decreases. In such cases, it is advantageous for landlords to include a 'hell or high water' clause, which requires contractual obligations to be fulfilled under any circumstances, guaranteeing rent payments in all situations. There is also the option of strictly defining force majeure clauses: by explicitly excluding reasons such as a fall in AI processing unit prices or declining profitability from the scope of force majeure, landlords can prevent hyperscalers from refusing to pay rent or unilaterally terminating the contract for such reasons.

"The Answer Is on the Ground"—Hwawoo Alternative Investment PG Team

Contracts for AI data centers are often signed in the form of long-term supply agreements lasting from at least 15 up to 30 years post-development. In the course of these long-term operations, there inevitably arise 'gray areas' that are difficult to specify in the contract. Attorney Park noted, "Over long operational periods, it is often difficult to clearly distinguish between the landlord's and tenant's responsibilities for maintenance and operations." Attorney Kwak stated that finding and mitigating such gray areas falls within the scope of legal advisory services.

The Hwawoo Alternative Investment PG Team was reorganized and expanded in 2022 by integrating their real estate finance team with the corporate crisis response team. The team oversees a broad range of alternative assets, including energy and infrastructure. They go beyond revising contract language or performing legal reviews; they engage directly with clients and provide field-oriented advice. Attorney Park explained, "We incorporate in-depth understanding of specific conditions, such as rental rates per power capacity and prevailing industry practices, into our legal counsel." The team continues to strengthen its expertise by continuously recruiting professionals with more than ten years of experience, such as attorney Daesagong, who completed a secondment at Macquarie Capital Korea, and attorney Kwak, who specializes in cross-border work.

This content was produced with the assistance of AI translation services.