The life science industry has undergone a remarkable expansion and maturity worldwide in the last decade. Funding – from life science corporates, venture capital (VC) and governments – has risen steadily over this period, while new technologies have sparked innovations and breakthroughs across biotech, pharmaceuticals and medical technology. These range from DNA sequencing, gene therapy to vital medicines, testing capability and vaccines related to all manner of infectious diseases. In addition, technologies that better diagnose and promote health monitoring, and digital services which use data to improve health outcomes and improve efficiency, have also blossomed. In early 2020, with the onset of the Covid-19 pandemic, both public and private funding rocketed. This crystallised the high societal value of the life sciences sector as never before. At the same time, the pre-pandemic tailwinds – including an ageing population, rising lifestyle diseases and the trend towards private healthcare – all continued to build.
The confluence of new capital and heightened social demand for life sciences products and services has caused real estate demand to surge. The UK is at the centre of the growth in the European market, with more than 250,000 scientists and professionals congregated in innovation districts.
According to Savills data, almost £20bn of life science-related venture capital was raised by companies headquartered in the UK, up 23% higher than 2019. Record-breaking venture capital funding creates future employment growth, which therefore a leading indicator of real estate demand. According to a recent ULI survey, interest among investors and developers is motivated by risk-adjusted returns (35%), the potential for capital growth (28%) and diversification (20%). More broadly, tailwinds supporting the real estate sector include onshoring trends, the rapid expansion of biomanufacturing research & development, perceived safe-haven status amid the pandemic disruption and alignment with investors’ ESG investment allocations. Consequently, there is significant financing demand and liquidity for life sciences real estate.
These tailwinds have driven innovation district goth across the UK, mirroring the trend in the US. In the UK, the most prominent is the ‘Golden Triangle’, comprised of hubs across London, Oxford and Cambridge. It is a world-class cluster where life science corporates collaborate with technology expertise, universities, research and development, and government agencies to compete internationally. Beyond which, JLL has identified Manchester, Leeds, Nottingham, Edinburgh and Glasgow as the next tier of UK hubs, followed by more embryonic districts in Bristol, Newcastle, Birmingham and Cardiff. Over time, a ‘Northern Arc’ may emerge combining Manchester, Leeds and Newcastle.
Innovation clusters can increase the productivity of companies and organisations, accelerate the innovation that underpins scientific breakthroughs and commercial growth, and create an environment where new ventures – comprised of corporates, academics, and government agencies – are conceived. Where these clusters are successful, talent will follow, which improves productivity and innovation, and attracts more talent and spurs new start-ups and draws in VC funding. All of which creates economic activity, jobs and real estate demand. The Oxford Science Park, owned by Magdalen College, is an example of these self-reinforcing trends manifest and a benchmark for real estate investors and developers to emulate. To capitalise on rising demand for life sciences real estate, the college is looking to sell a 40% stake in the park to a strategic partner reportedly for around £100m. The science parks’ tenants have been involved in the fight against Covid-19 through vaccines, sequencing, viral vectors and test reagents, occupying the office and lab space.
Beyond the pandemic, there are powerful structural headwinds which support the sector’s appeal. Real estate investors eager to allocate capital to the life sciences sector, will be looking at similar indicators that appeal to VC investors. Identifying the corporates best positioned to benefit from the mega tailwinds – namely, demographics and the convergence of science and technology. Identifying the ‘winners’ which best capitalise on these tailwinds would be akin to finding future innovation district anchor tenants. For example, companies which capitalise on demographics will be found in the medical technology sector, which utilise data to improve medical outcomes and increase efficiency (e.g., telemedicine, age-tech, and mobile apps). Corporates that effectively combine scientific breakthroughs with technological advancements (e.g., adoption of automation and robotics) may stand to benefit from next generation economies of scale. These tailwinds also align with post-pandemic and ESG requirements. Corporates that can demonstrate world-class standards in these areas will be considered blue-chip covenants by real estate investors.
Tenant requirements are aligned to sub-sector specialism and phase of corporate development – from start-ups and scale-ups to mature pharmaceutical companies. Requirements range from types of lab spaces to office and manufacturing space, with the mix of these evolving with company growth and access to external funding. It can be operationally demanding for real estate investors to keep pace with concurrent and different demands across a park.
Within the over-arching favourable tailwinds for the industry, real estate investors need to undertake careful due diligence. As the boon in life sciences accelerates over the coming decade, ever greater capital will drive increased economic activity, jobs growth and, ultimately, real estate demand. The increased institutionalisation of the industry will also increase investor expectations. We expect considerable alignment between all stakeholders – life sciences corporates, universities, government agencies and investors. Real estate requirements for emerging innovation clusters will coalesce around state-of-the-art technology (e.g., laboratories with automation and robotics, internet of things applications), disruption-resilient space to operate, and world-class ESG standards, fit to meet incoming regulatory compliance, and the carbon-neutral agenda. All of which will be built in locations that are designed as multi-disciplinary ecosystems, which will act as a magnet for the best companies, talent and new capital. The bar will continue to increase, and these standards will be the benchmark for divergent performance across the nascent real estate sector.
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