The surge in investment in life-sciences property in 2020 was not all about COVID-19, writes Rachel Fixsen.
Game-changing discoveries and technological advances – not to mention demographic shifts – have propelled growth in life-sciences real estate over recent years. But in 2020, the incalculable need for laboratory space, vaccine manufacturing facilities and medical centres triggered by the COVID-19 outbreak sent the property niche into overdrive.
Geographical hotspots for life-science real estate include Oxford, Cambridge, London and Paris within Europe, and Boston, San Francisco and San Diego in the US, although the sector is growing rapidly throughout the world, with China making a very strong play, according to Glenn Crocker, head of life sciences at JLL. “Cities with a strong academic life-sciences research base continue to be a top draw,” he says.
Early last year, with much of the world unaware of the scale of the coronavirus threat, the Chicago-headquartered investment firm Harrison Street took a step into the UK life-sciences market via a new partnership with Trinity Investment Management, buying a 1.6m sqft portfolio of five properties worth about £250m (€282m).
Rob Mathias, senior managing director and head of international business at Harrison Street, said back then that even though the UK had the second most advanced life sciences and innovation market in the world, the associated local property market was “vastly undeveloped”.
Legal & General has been working to boost space in the UK for life-sciences businesses through a £4bn partnership with Oxford University. In October it announced £200m of funding for the construction of a research and teaching facility within the university, which will be largest building ever created on the campus.
“Businesses working in life sciences often need dedicated, high-quality facilities in key locations, preferably within an ‘innovation district’ which has access to talent,” says Eleanor Jukes, senior investment manager at Legal & General Capital. “Many of the most established innovation districts in the UK are within historic boundaries. Therefore, the purchase of land, and the planning processes involved in building out a site, can be cumbersome.”
While Oxford’s position has been reinforced by the university’s co-development of the AstraZeneca COVID-19 vaccine, Jukes warns that the city and university risk losing their competitive edge without the continuing creation of appropriate space for life sciences.
By the autumn of last year, the life-sciences real estate market in the UK, as elsewhere, was receiving intense attention from investors, with huge sums of money gravitating in particular towards US medical REIT BioMed Realty – which owns a US portfolio in core life-sciences markets.
In October 2020, the REIT was at the centre of a major transaction when it was sold from one Blackstone fund to a new perpetual-life vehicle also managed by Blackstone. At the end of October, Blackstone revealed that it had raised $7.5bn (€8.5bn) for the new fund that will continue to add to BioMed portfolio.
US pension funds investing in the strategy have included Texas Permanent School Fund and Tennessee Consolidated Retirement System and New Mexico State Investment Council. In November, Bouwinvest Real Estate Investors, which invests on behalf of Dutch pension fund BpfBouw, said it had invested $60m in BioMed Realty, and subsequently, Sweden’s largest pension fund Alecta said it had committed $300m to BioMed Realty via the Blackstone open-ended fund.
Meanwhile, in October, US healthcare REIT Ventas spent $1bn acquiring a life-sciences portfolio from Bain Capital Real Estate and Phase 3 Real Estate Partners for its Life Science and Healthcare Real Estate Fund, more than doubling the fund’s assets to $1.8bn.
US life-sciences property firm IQHQ announced in November that it had raised $1.7bn from investors to fund the expansion of its development pipeline in markets including Boston, San Francisco and San Diego. The developer said at the time that the fundraising included a $158m contribution from CenterSquare Investment Management, and real estate private equity firm Madison International Realty subsequently disclosed that it had committed $100m.
AXA IM Alts moved into the European life science real estate sector for the first time at the end of November, paying what was understood to be about €500m for Kadans Science Partner, which had been in the hands of funds advised by Oaktree Capital Management.
With 20 science parks and lab offices in the Netherlands, UK and Germany – along with seven more developments in the pipeline – Kadans is a clear market leader in the sector, says John O’Driscoll, head of European transactions at AXA IM Alts.
Amid November’s flurry of demand for life-sciences investment exposure, Breakthrough Properties – the life-sciences real estate investment firm formed the year before by Tishman Speyer and Bellco Capital – said it had raised an initial $1bn to develop and buy lab facilities around the world. The venture raised the initial capital for its main investment vehicle, the Breakthrough Life Science Property Fund and in co-investments, and said it was looking for additional capital, including for a perpetual-life vehicle created as part of the fund.
Rob Speyer, Tishman Speyer’s president and CEO and co-founder of Breakthrough, said the venture aimed to be “a major provider of best-in-class specialised centres – providing a complete ecosystem of support for real innovators pursuing scientific breakthroughs”.
International law firm Goodwin argues that the soaring demand for real estate facilities tailored for companies in the growing life sciences industry has turned life-sciences real estate – or ‘propsci’ – into a real estate asset class distinct from industrial or office space. As such, investors need to consider propsci allocations separately within their portfolios for diversification and growth opportunities, according to Goodwin.
The firm cites the “once-in-a-century” pandemic as only one of the factors continuing to drive investment in the life-sciences sector. Others include an ageing global population and the coming together of scientific breakthoughs, including cell and gene therapies and artificial intelligence.
Another factor supporting the surge of investor demand for life-sciences real estate lies in its relative resilience to one of the commercial effects of lockdown measures. Matt Weir, senior vice-president within Taconic Partners’ commercial asset management department says tenants in the sector have unique real estate needs, such as upgraded mechanical infrastructure, high ceilings and robust floor loads, adding that users are distinct from conventional office tenants.
“This has helped isolate the life-science sector from the adverse impacts to the broader commercial real estate market brought on by the work-from-home movement,” he says.
Matt Smith, director of leasing UK markets at BioMed Realty, says that, as a separate real estate asset class, life-sciences property gives investors the chance to build a portfolio around investments that benefit from clustering in innovation districts – and the “triple helix” of government, universities and industry.
“In the life-sciences sector, scientists and researchers collaborate more extensively to accelerate R&D solutions, a trend that will likely increase in the core innovation markets,” he says. “We would expect biotech companies and research institutions to seek out experienced, well-capitalised owners with full-service, integrated platforms to ensure their mission critical facilities operate without interruption.”
Tom Renn, managing director of Bruntwood SciTech, a joint venture between Legal & General and commercial property specialist Bruntwood, says investment in the UK’s ‘Golden Triangle’ of Oxford, Cambridge and London, is still only 55% of the money Boston attracts. “I don’t believe we will get to Boston levels, because the funding climate is not as conducive in the UK as it is in the US and, of course, because the national life-science market is smaller in the UK than the US – but it definitely has the potential to grow significantly.”
Crocker says it is easy to see how the UK life-sciences sector could increase by 50% in the next five or so years, but even though the UK life-sciences market is the most developed in Europe, he adds that its real estate will always be a niche area.
“It depends on the growth of the sector over the coming years, which itself is driven by public and private investment,” he says.
But in the US, Crocker says, life-sciences real estate is an asset class in its own right, with investment up by 6.6% percent over the previous 12-month period, providing evidence for the resilience of the sector. “More than $7bn of investment took place across the US alone in the past 12 months,” he says.
Alongside the established US markets for life sciences, Weir says Taconic Partners sees particular opportunities in emerging markets such as New York City. “In NYC, while there is an outsized presence of academic institutions, the largest life-science workforce in the country, and significant public and private research funding, the availability for laboratory space is severely constrained,” he says.
Taconic Partners and Nuveen Real Estate unveiled plans in October to redevelop an eight-storey commercial property in New York City into a 400,000sqft purpose-built lab building. The 125 West End Avenue space had been part of the campus of broadcaster ABC, with the media company due to vacate the premises in January 2021.
How long will the pandemic continue to drive demand for property in this sector? The focus on life-sciences real estate reflects a bet among investors that the critical role it has played during the pandemic is set to continue, according to Crocker.
“There will be repercussions from the pandemic for years to come as countries and companies look to increase local resilience – for example, re-shoring manufacturing and other services,” he says. “But the life-science industry was on an upward trajectory before the pandemic struck and this will continue post-COVID.”
Weir notes the number of new real estate players exploring the market. “For institutional investors looking to participate in life-sciences real estate opportunities, it’s important to consider the experience of the operator and the physical attributes of a property, among other factors,” he says.
Source: I&PE Real Assets