As life sciences companies race to expand across Europe’s top markets, the real estate industry prepares to experiment with a new alternative asset class.
In today’s connected universe, no real estate trend emerges without being formed by an array of economic, geo-political and demographic factors. The growth of the life science industries – and their parallel property push – has marked one of the industrial success stories of the US over the past two decades, but its arrival is really no surprise.
As demand for health services has soared across the developed world in the face of ageing populations, in parallel with an acceleration of technology, venture capital has been drawn to the sector in record amounts. In the US, the life sciences industry has grown nearly five times as fast as the economy since 2000, according to Cushman & Wakefield data.
‘Essentially the tech area of healthcare, the life sciences sector has become a broad and growing collection of everything from diagnostics, genetic reading and writing and personalised medicine, to medical device technology, pharmaceutical research and development, and much more,’ says Greg Bisconti, C&W executive director and leader of the firm’s life sciences advisory group in the US. ‘Those forces, in turn, drive increased demand for lab space in both gateway and secondary markets.’
Recent mega deals from the likes of private equity giant Blackstone and Chicago-based REIT Ventas, which invests primarily in US healthcare assets, are already shaping the North American market, marking the emergence of dominant players.
A recent Cushman & Wakefield report which surveyed 125 million ft2 (1.2 million m2) of lab space in 11 key US markets identified a vacancy rate of just 8.4% – well below the national office vacancy rate of 13.3%. According to the figures, average life science rents have increased some 33.2% in the past decade in the US, compared with a 17% uplift in office rents.
Signs of growth in Europe
Now, ‘seismic shifts’ are set to transform the life sciences industry across Europe in the next few years, driving up competition for amenity-rich facilities in a select group of top markets, according to JLL’s new head of UK life sciences, Glenn Crocker. The changes are being ‘driven by fierce competition for talent and innovation’, Crocker says, which will lead firms to ‘focus on location, working environment and local life science ecosystem, each of which has property at its heart’.
According to Crocker, the UK, and London in particular, is quickly emerging as the most important life sciences location in Europe. ‘We have seen some big developments announced, with around 5 million ft2 of pipeline projects coming on line in the next 5-8 years,’ he notes.
The Stanhope scheme behind the British Library is a key example of this, which is going to be transformative for the whole Kings Cross area, which already has a strong
reputation for tech.’
Overall, the life sciences sector is one of ‘massive opportunity’, notes Crocker. ‘It is already a big industry, but it’s going to be huge in the coming years’, he says, pointing to France and Switzerland as other significant European markets creating science clusters.
In Europe, very little transactional data is available to date on this emerging asset class, and investment returns are not quantifiable as yet. However, an interesting point of comparison can be made with the US, where life sciences real estate has already crystallised into a much sought-after property type.
Despite the industry’s current potential in the UK, Crocker fires a warning note over Brexit. ‘There are going to be regulatory challenges,’ he says. ‘Companies are having to register drugs in mainland Europe. I don’t think it will fundamentally affect the research base here, but it will add costs. That is affecting everyone from the very big guys to the small firms,’ he adds, wondering if companies are essentially spending a lot of time and money preparing for something that might not happen.
Crocker identifies a ‘broad range’ of investor types now seeking to enter the sector, including traditional office investors looking to diversify, as well as funds which have already demonstrated an appetite for alternatives in general.
In the market-leading UK, Legal & General (L&G) is the largest single investor dedicated to the sector. At the end of June, the insurance giant formed a £4 bn (€4.5 bn) partnership with Oxford University to develop homes for university staff and students, together with science and innovation districts in and around Oxford. The announcement came six months after Legal & General Capital joined with UK real estate company Bruntwood to create a property platform that will ultimately comprise a £1.8 bn portfolio of science and technology facilities across the UK.
The focus in this alliance is again on regional cities, with the two partners investing £360 mln (€408 mln) of capital, property and intellectual assets into a new company, Bruntwood SciTech. The new vehicle’s existing assets include more than 500 science and technology businesses ranging from digital start-ups to global life sciences companies, centred around flagship assets and development projects in Manchester, Birmingham and Leeds, with new schemes planned for Liverpool. Bruntwood SciTech’s assets are set to grow from 1.3 million ft2 (120,000 m2) at launch to over 6.2 million ft2 over the next 10 years, according to the partnership.
‘Our focus is on creating thriving cities – breathing life into places where knowledge-based businesses can start and scale, driving growth for the UK economy,’ says Bruntwood CEO Chris Oglesby. ‘One of the reference points for us, is that in the US there are dominant institutional owners of science parks, and that doesn’t exist in the same way in Europe,’ Rachel Dickie, head of urban regeneration at Legal & General Capital, tells PropertyEU. ‘There is scope to have more consistent ownership of the bases across the European continent.’
L&G forms €4.5b development alliance with Oxford University
In the UK, which leads the life sciences market in Europe, Legal & General (L&G) has emerged as the largest single investor dedicated to the sector. At the end of June, the insurance giant formed a £4 bn (€4.5 bn) partnership with Oxford University to develop homes for university staff and students, together with science and innovation districts in and around Oxford. ‘Oxford University is one of the best in the world. It has inspired generations of academics and researchers, and today nurtures outstanding modern businesses with world-leading potential,’ said Nigel Wilson, CEO of L&G Group.
As funding and development partner for the university, L&G’s Future Cities business will provide up to £4 bn of funding over the next 10 years from L&G’s shareholder, annuity and LGIM-managed funds. Subject to planning, L&G said the funding will deliver a series of projects for the university.
Oxford is one of the UK’s fastest growing cities according to the Centre for Cities 2016 Fast Growth Cities report, and competes among the top technology clusters in the world.
However, according to L&G, the city lacks affordable residential and commercial space that is essential for the university to continue to attract research graduates, and support spin-out and scale-up businesses.