[How to Invest in AIDCs] "Korea Faces Data Center Shortage... Numerous Equity Investment Opportunities for Institutions"

Hwawoo Alternative Investment PG Team
Sought After by Both Domestic Institutions and Foreign Private Equity
"Legal Counsel Essential for Managing Contract Risks"

"In the past, data centers tended to be concentrated only in Japan due to its robust power infrastructure. As of the publication date, however, Korea ranks third globally in the fields of artificial intelligence (AI) and AI data centers, making it an attractive and well-equipped market for hyperscalers, which is leading to active investment."

Youngwoo Park, partner attorney in the Alternative Investment Practice Group (PG) at Hwawoo Law Firm, predicted that the supply of domestic AI data centers would be extremely insufficient compared to demand, and investment demand in this sector would therefore continue to increase for the next five years. However, he also advised that there are certain risks that require attention when investing, such as contractual risks with hyperscalers or risks from local civil complaints, and emphasized the importance of thorough legal consultation.

Attorneys Sa Gongdae (from left), Youngwoo Park, and Jiwon Kwak from Hwawoo Law Firm are posing for a photo. Photo by Dongju Yoon

Trending Investments: Korea's AI Data Centers

Institutional investors are mainly investing in Korea's AI data centers through two approaches. One is acquisition of equity in data centers that have already been completed; these completed projects are mid-risk, mid-return investments where, with tenants already secured, a stable cash flow can be expected. On the other hand, development-type investments involve participating in the entire process from site acquisition, design, construction, to securing tenants. While this structure involves higher initial risks, it also allows for profitable exits by selling at higher prices after completion—making it a high-risk, high-return model. Currently, development-type investments are the dominant trend, and participation from overseas investors is particularly notable. Partner attorney Daesagong stated, "Most recent legal consulting cases involve development-type investments, and not only domestic but also many international investors are actively participating." The key advantages of Korea's AI data center investments, cited by these lawyers, are strong power and water infrastructure. Attorney Daesagong explained that, unless affected by extraordinary physical events, Korea Electric Power Corporation provides stable electricity supply, and measures such as maintaining transmission line capacity at half ensure high stability—factors positively regarded by foreign investors. In fact, Hwawoo Law Firm recently provided legal counsel on asset transfer investments involving a Singapore-based private equity fund and a listed Korean company forming a local joint venture (JV), with multiple special purpose companies (SPCs) established to participate from the earliest development stages.

The momentum behind AI data center development is now spreading to regional areas outside the greater Seoul area. Investors still prefer data centers in metropolitan regions such as Seoul and Gyeonggi Province, not only because of infrastructure but also because operation and maintenance (O&M) personnel are concentrated there. However, as new construction has become virtually impossible within Seoul due to power shortages, demand for development is shifting toward the outskirts and non-metropolitan regions. A notable example is a Singaporean fund recently making a minority equity investment in an AI data center project in Pohang, North Gyeongsang Province. Senior foreign attorney Jiwon Kwak commented that in non-metropolitan areas, the use cases for AI data centers are diversifying—for example, as backup or for AI model training—making such regions increasingly viable as data center sites. In particular, for AI model training centers, because data latency is not critical, geographic distance is less important, so there is ample opportunity for new demand outside the Seoul Capital Area.

Are There Investment Risks? Key Contractual Points

One critical point that institutional investors must heed in development-type investments is the importance of securing end users. Failure to attract tenants such as hyperscalers—including companies like Microsoft in the United States—can result in vacancies and investment failures.

Once a tenant is secured, a "showdown" often develops between the landlord and the tenant. Whereas development companies (developers) or landlords have typically held the upper hand in traditional data center deals, for AI data centers, hyperscaler tenants now wield the dominant bargaining power. Since preventing vacancies and ensuring long-term returns depends on retaining these tenants, landlords are often compelled to accommodate end user demands. Attorney Kwak explained, "Hyperscalers will frequently present their preferred standard contracts and sometimes aggressively insist that the investor or landlord agree to their terms." These tenants frequently enforce contract provisions favorable to themselves, such as Non-Disturbance Agreements (NDA), which guarantee their rights to occupancy even in cases of changes in control or disputes.

For example, hyperscalers may include provisions in the contract allowing them to withhold rent if AI computation unit costs decline. In such cases, it benefits landlords to include a "hell or high water" clause (requiring the fulfillment of payment obligations under any circumstances) to guarantee that rent will always be paid. Another approach is to define force majeure clauses strictly: whereas hyperscalers may try to suspend rent payments or terminate contracts due to falls in AI computation prices or profitability, landlords should ensure that such commercial reasons are specifically excluded from the definition of force majeure events.

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

AI data center contracts are often long-term supply agreements spanning at least 15 to 30 years after development. Throughout these periods, gray areas—issues that are hard to specify in the contract—can arise. Attorney Park noted, "In prolonged operations, it often becomes difficult to precisely delineate the responsibilities for maintenance and operation between landlords and tenants." Attorney Kwak mentioned that identifying these gray areas and mitigating the related risks is a crucial role for legal consultants.

The Hwawoo Alternative Investment PG Team is an organization expanded and restructured in 2022 through the integration of its real estate finance and corporate crisis response teams. The team covers a broad range of alternative asset sectors, such as energy and infrastructure. Rather than simply editing contract clauses or legal opinions, they offer client-focused, field-oriented advisory services, directly communicating with clients. Attorney Park said, "We deeply understand and reflect critical conditions and industry practices—such as rent per unit of data center electrical capacity—in our advisory services." The team continues to strengthen its expertise by recruiting talent with over 10 years of experience, such as attorney Daesagong (who undertook a placement at Macquarie Capital Korea) and attorney Kwak (who specializes in cross-border practices).

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