‘The level of institutional capital being raised within the life sciences sector has increased significantly in recent years. The answer to the question of whether this is a ‘Covid thing’ is no; the sector and key players within it have been growing for decades. The world is getting better prepared for the next pandemic, whenever that may be, and people are growing older. Funding will grow for healthrelated companies as a result and real estate will have to grow alongside to play its role and provide a ‘home’ to accommodate these companies.’

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Changing models of discovery for cures and preventative medicine have implications for who and which companies are emerging in the life sciences sector, as well as how and where they are creating solutions for human healthcare.

Predicted rises in public spending on healthcare, ageing populations, and the proliferation of illnesses, provide a reason for finding better solutions and faster. Companies providing the personalisation of medicine, with targeted therapeutics, are attracting a large in-flow of capital to help them establish and grow.

At the same time, large corporates, specifically the technology companies like Alphabet, Meta, and Amazon, have focussed considerable time and money into trying to solve the known and anticipated health problems for today and into the next couple of decades. This is an additional driver as the technologists are looking at becoming biologists. A massive structural shift in the life science industry is coming as a result of the rise of data, AI, and machine learning, which will shape R&D investment in the future.

A Venture Capital boom

The life sciences sector has seen company capital fundraising of around US$ 4.6tn during the past 10 years, equivalent to the GDP of Japan. Around 40% of this was raised in the past three years alone. The onset of Covid-19 resulted in a record year for fundraising in 2021 and, although this was the peak in the current cycle, the US$ 1.7tn raised since the beginning of 2020 will enable companies to grow, expand, and prosper during the remainder of this decade.

This growth will require real estate throughout the life science product supply chain; from discovery to production, as well as the surrounding ‘book-end’ phases of academia, at the start, and patient care, at the end. It is thus fair to say that the real estate requirements are diverse. They range from specialist lab space, to start-up incubators, to major headquarters offering traditional office space. Unlike some other industries, life sciences doesn’t usually support work from home, so the sector is resilient to wider changes in working practices.

Locations with access to talent that straddles science and technology will become more important and the focus for investors. The collaborative nature of the science sector means that the ecosystem is vital, often following the ‘Triple Helix’ model where locating in the middle of a Venn-diagram overlap of academia, government, and corporates is key. Understanding the talent pool, on a global basis, is as important as reviewing the infrastructure and connectivity. Key global cities have increasingly emerged onto investors’ agendas, where skills bases are larger and more diverse.

The life science industry is striving for greater efficiency and lower energy use, as are all other sectors, to create more environmentally friendly workspaces within the sector. The power requirements for laboratory buildings are unsurprisingly high; the number of air changes in the laboratory environment are much greater than offices, which comes with a higher carbon cost, while equipment for scientific discovery requires more energy input. Life sciences also offers clear S and G benefits to investors.

Following the earth’s rotation

Some institutions have been investing in life science related real estate markets for years, comfortable with the proposition and how to manage the needs and the wants of the occupier. The US has specialised REITs that only invest in this sector, and so dominates investment globally (Chart 23). However, competition for opportunities at home is driving investors to new overseas locations, and we see growing opportunities across Europe and Asia Pacific in the next few years.

In the UK we have seen dozens of new entrants, most of which were US investors that have been crowded-out from their domestic market. Overall, 55% of UK investment transactions in the past couple of years were by new entrants. We have also seen an increasing appetite for mainland Europe. Only a couple of years ago there wasn’t significant evidence of a rental premium for life science space, specifically laboratories, when compared to offices. Now, there is the evidence and premia have emerged, therefore competition for investment opportunities has increased and some investors are looking for more of a value-add opportunity in European markets. Some large investors are finding that opportunity by funding large-scale development. 

The flow of investment from west to east will continue. India in particular is expecting to see over 100mn sqft of demand from occupiers between now and the end of this decade; equivalent in scale to a couple of Boston/ Cambridge US markets in terms of life science real estate stock. The opportunity here will be centred around centres of excellence including Hyderabad, Bengaluru, and Mumbai. Public health spending in China will lead to much higher demand for R&D and real estate will follow the same trajectory. Shanghai will be the key location, although transactions to date are low and puts the life science real estate sector in the niche category.

Searching for scale

The largest investment opportunity is building from the ground up, but within established markets and/or where the in-country provision of human health services is expected to grow significantly, e.g., India it is still a credible strategy to acquire individual buildings within strong ecosystems. However, we tend to find the investors that are comfortable with this sector want to invest on a much larger scale. If building-by-building is the preferred strategy, then ‘following the money’ in the key cities would be prudent (Chart 24).

The question we get asked a lot is how much longer the appetite for life sciences will continue. The answer to this is that the sector will continue to benefit from the current ‘super-cycle’ in innovation; there are so many facets of human health, with the cross-over to technology, that the sector will grow continuously. Discovery is not going to end.

We can see real estate investors allocating more capital to the sector in the next five years. The locational analysis will be critical and the key global cities will provide good opportunity for those that want smaller, but still considerable, lot sizes. It is important for investors to remain mindful of the supply-demand dynamics in some markets as the rental premia that we are seeing today will recede as more supply comes online to accommodate the expected demand from life science companies. There is also a need to review the whole supply chain of the life science industry, and this will emerge in the next few years as investors seek and find alternatives within this maturing alternative sector.