EVOLVING OPPORTUNITIES IN THE LIFE SCIENCES SECTOR
The ongoing seismic shifts in the office and retail sectors mean that occupier demand has become less predictable and resilient. As a result, investors are increasingly seeking opportunities in sectors previously considered ‘alternative’, high risk or specialist.
The global life sciences sector is very much in the ascendancy, propelled by the pandemic and a range of underlying long-term demand drivers. This sector is increasingly on the radar of property investors, and for many, it is moving from ‘opportunistic’ to ‘core’.
For global property investors, the UK is an obvious choice. A world leader in life sciences, particularly in certain specialisms such as genetics and genomics, it benefits from a highly developed infrastructure and skills base, boasting three of the top ten global universities in this field. The life sciences are also relatively ‘Brexit-proof’ and less prone to the impacts of the remote working revolution.
The sector has benefitted from a significant increase in private funding, underlining the expectation of strong growth over the next few years.
There is also increased Government support with the Office for Science and Technology Strategy aiming to place it at the centre of Government policy
and services, whilst the NHS has committed to utilising the best value
new technologies.
Property market activity and pricing
Some significant property transactions since 2020 demonstrate the sector’s attractiveness, including:
Evidence of the market strengthening is clear. Taking Cambridge as an example, prime out of town office rents have increased to £37.25 psf compared with £36.00 psf a year ago, but considerably higher rental levels are now being achieved on pure lab space. This reflects the remarkable strength of demand and lack of supply for this type of accommodation. Occupier demand in Cambridge continues apace. For example, Endomag, a cancer surgical guidance company and one of the UK’s fastest-growing private technology businesses, has secured 20,386 sq ft of space at 330 Cambridge Science Park. Advised by Carter Jonas, Endomag has agreed a ten-year lease.
Likewise, capital values in the city have surged and yields have compressed. The September 2020 purchase of unit 296 at Cambridge Science Park by South Cambridgeshire District Council achieved a net initial yield of 5.95%. Subsequent transactions saw the yield shift down to 4.53% in January 2021 and 4.21% in February. The most recent deal at the park completed in May 2021 at just 3.6%. This is in stark contrast to yields on traditional prime office space which have remained relatively static at circa 4.75%.
The opportunity for development
The major challenge for the sector in the UK is a lack of supply. Although this is positive for rental value growth, it risks becoming a significant barrier to investors wanting to enter or expand their presence. Unsurprisingly, given
the sector’s current profile and prospects, an increasing number of non-specialists are looking at ways to gain a foothold, further boosting
investor demand.
Development is an obvious route for investors where no standing stock is available, although life sciences space requires a high degree of specialist knowledge. It is costly to build and requires flexibility to meet the needs of a broad spectrum of occupier type.
Additionally, location is paramount. Agglomeration is seen as essential by many occupiers in the sector, helping them share knowledge and benefit from a labour market with specialist skills and experience. Successful locations are often underpinned by other fundamentals such as a leading university, a teaching hospital, a Catapult centre, or a prominent private sector corporate.
Another consideration is good design, and flexibility is vital. As businesses move on, there needs to be sufficient adaptability for space to be re-let, enabling new start-ups and SMEs
to develop.
There is also a need to offer flexibility between lab and more traditional office space. Indeed, the requirement for office space is growing as digital technology allows ‘virtual labs’ to undertake work that may previously have required specialist lab space, and the role of artificial intelligence increases. New stock should meet these needs, as well as support collaboration between the various occupiers of a multi-let building and other organisations within a wider cluster.
Beyond new development, investors are looking at ways of repurposing assets, including the growing surplus of secondary office and retail space in central locations, given the momentum from the life sciences sector to locate in city centres. In Cambridge, for example, Legal & General is currently disposing of the Grafton Centre, the city’s second-largest shopping centre. It is noteworthy that the marketing strategy is heavily geared towards its prospects as a mixed-use scheme and the potential to utilise space for life science and broader technology use. The mere fact that this proposal is being advanced - for a major shopping centre in a thriving city centre - speaks volumes about current market conditions.
Nevertheless, this type of strategy will not be possible for all buildings. The life sciences sector often requires sufficient floor to ceiling height, floor loadings, or power capabilities. As a broad generalisation, retail space may meet these specifications to a greater degree than offices. However, it is perhaps too easy to see it as a solution to an underperforming asset as, for the myriad of reasons discussed, the market is highly specialised.
CONCLUSION
Moving forward, the lack of space in strategic locations is a major constraint for the sector in the UK, and the delivery of appropriate accommodation is key to its continued expansion. However, for those with the support and innovative strategies, the opportunities remain immense.
The acquisition of Kadans Science Partner by AXA Investment Managers – Real Assets from Oaktree Capital in late 2020, a portfolio that includes locations in the Netherlands, Germany, and the UK.
Brookfield Asset Management’s purchase of Arlington from TPG Real Estate Partners for a reported £714 million, a portfolio that spans 36 innovation-led sites. This follows its acquisition of a 50% stake in Harwell Campus last year.
Harrison Street Real Estate Capital and London-based Trinity Investment Management signing an agreement to purchase five UK life science properties for £250m.
Magdalen College selling a 40% stake in The Oxford Science Park to GIC, Singapore’s Sovereign Wealth Fund, following intense interest from a range
of potential buyers. The college sought a ‘strategic partner’ to deliver a development programme to help the park reach its full potential and capitalise on the strength of demand. This will accelerate the rate of development at the scheme, and the next phase of construction is expected
to start soon.
US life sciences specialist BioMed Realty, part of the Blackstone Group, acquiring Cambridge International Technology Park and a site at Granta Park. The investment totals £850m, with the potential for 800,000 sq ft of lab space.
It is noteworthy that many of the transactions highlighted in the previous section are primarily development-led, illustrating the current huge investor appetite for development risk.