Understanding life sciences: the opportunity for real estate
The life science sector has been thrust into the spotlight during the pandemic as scientists worked to develop Covid vaccines.
Coupled with a Government focus on life sciences as a growth sector, it is attracting increasing amounts of investment. By the end of Q1 last year, the amount of investment pouring into the sector was already half 2020’s total.
This is fuelling demand for space, and the life science sector has become a hot ticket for real estate. When the Life Science REIT launched in November, its target of raising £300 million was exceeded by £50 million.
Last year Blackstone spent £850 million on two sites in Cambridge where it plans to develop 800,000 sq ft of lab and office space, Derwent London spent £200 million on properties in London’s Knowledge Quarter around King’s Cross and Euston, and the Ellison Institute for Transformative Medicine, marked its first acquisition in the UK property market with the purchase of a prime life science property in Oxford.
Life science businesses present an opportunity; however, it is a niche sector with niche requirements.
Fit-out costs and commitment
Fit-out can be complex, and the costs are usually high, but this can mean a commitment to a longer lease. Lab work means staff on-site rather than working from home. All of which is a plus for landlords and investors looking for certainty in a market where flexible and short leases are a growing trend.
But targeting space to attract the life science sector isn’t straightforward.
“Fitting out life science space is obviously not as straightforward as a normal office fit-out process. It’s usually incredibly bespoke as to what a particular organisation is going to do: How much wet lab space, how much dry lab space, how much office and break out space are factors that will have to be considered when it comes to configuring space, as well as in relation to permitted use, licensing requirements and possible planning restrictions” says Tom Calnan, Partner at Trowers & Hamlins.
As such, no investment into this sector can be discussed without factoring in planning uses and consents required to do that sort of work. The planning and the pre-development process is key and highly technical.
Bespoke or speculative?
Space for the life science sector doesn’t necessarily have to be design and build for a specific occupier, but speculative development is harder to get right. One type of space might be suitable for one branch of life science business but not another, which narrows the pool of potential tenants and makes future-proofing trickier.
If an asset manager has elements of a property portfolio, such as retail space, which is struggling, is change of use feasible?
Lizzie Pillinger, Partner at Trowers & Hamlins, believes it can be: “You could look at partnering with occupiers and if you’ve got the right location, and the right building you could realise huge values.”
The right building means high ceilings and large floor plates to accommodate and fit equipment and ventilation systems.
Tech take-over of life sciences
But not all life science businesses are ‘lab coats and test tubes’. In the last decade, the boundary between tech and life sciences has blurred.
Pillinger says: “There are companies that operate within the life science sector that solely deal with data collection and analysis. They operate out of a relatively standard set of offices.”
Tech companies have expanded into the health sector, buying life science- businesses or forming collaborations. For example, in 2014, Google bought the AI company DeepMind and the number-crunching technology is being used to develop new drugs.
During the pandemic, an app was developed for scientists to gather and analyse data from volunteers to better understand the range of symptoms presented by the Covid virus.
And late last year, the Ellison Institute for Transformative Medicine, bought a 5.9-acre site on Oxford Innovation Park with plans to develop space for vaccine research and scientific data collection.
Location, location, location
And while the type of space and spec is important for certain life science businesses, what is key for all is location. Planning designation is important; some out of town parks are specifically designated for life sciences, for example.
But whether in town or out of town, proximity to universities and teaching hospitals is crucial.
Oxford, Cambridge and London form a golden triangle for the life science sector because of the academic and medical talent and expertise located in the area. Universities collaborate with the private sector; the Oxford AstraZeneca Covid vaccine being a notable example.
As well as famous universities and teaching hospitals, proximity to research institutions can be a draw. The Francis Crick Institute at King’s Cross, for example, is home to 1,000 scientists and the largest biomedical lab in Europe and sits at the heart of London’s Knowledge Quarter.
Outside of London, examples of life science clusters include Newcastle, where the University has been leading on dementia research.
The magnetic pull of prime academic and medical institutions means competition for sites in or around life science clusters is stiff.
Calnan says: “It’s an incredibly competitive sector, as has been shown by the recent bidding wars on key sites. The sector is highly in demand at the moment, which means that existing assets and development opportunities in the space are being bid on aggressively by some very high profile private equity funds and UHNW investors. As such it has become an expensive sector to be involved in in terms of up-front investment – however it is also a sector that has demonstrated considerable value for developers and investors.”
The buzz around life sciences shows no signs of abating any time soon, but Calnan cautions:
“It remains a highly technical and specialised sector. There is significant forward engineering and forward planning that comes with these sorts of opportunities.”