Dealmaking is in a downturn. The impact of higher interest rates, geopolitics and economic uncertainty has stalled deal activity across all sectors, not just those related to life sciences. In the real estate sector, the focus on VC trends has been high. Why is this?

The VC world is watched closely, and the trends within it are seen as the bellwether of future corporate growth and, ultimately, real estate demand. The emergence and subsequent growth of start-ups through to scale-ups is a good news story and exciting prospect to consider for commercial property owners. However, on average, VC represents between 5% and 6% share of the total level of life science-related capital raising in the past five- and ten-year periods. Despite its relatively low share of the total, VC does initiate company growth through increased employment, and it is worth reviewing the 2023 levels in comparison to the pre-pandemic levels. The chart below presents a comparison between the eight years leading up to the start of the pandemic and also the total VC for the past three full years. The slowdown since the peak of 2021 is well documented; however, the chart shows that for 2023, most countries have seen a higher level than the pre-Covid period. So, not all bad.

The picture for the UK is positive in terms of the venture funds actively looking at life science-related opportunities. Nearly 300 funds identified that have deployed £85.7bn between them, albeit on all sectors not just life sciences. This is still an enormous number. These funders will have 'dry powder' to spend.

It is worthwhile to review the other financial-led catalysts for increased commercial real estate demand. A larger impact on occupier demand may derive from mergers and acquisitions (M&A), refinancing and buyouts. So what are the other areas to focus on that will create future life science-related demand for commercial real estate, including offices, laboratories and more mid-tech and industrial property types?

Corporate research and development (R&D) spending is an important driver of future growth. For the top 2,500 companies, in terms of R&D spend globally, the total amounts to around US$1.2tn per annum. This is twice the annual GDP of Sweden. For the Pharmaceuticals & Biotechnology sector, it accounts for a fifth of the R&D total. Indeed, within the top 30 global companies, there are ten of the well-known pharmaceutical companies, including Roche, Johnson & Johnson and Merck (the top 3 for the life science sector). Some of these large biotech/pharma corporates are growing their R&D spend by over 15% per annum. Also, the intensity of the R&D, expressed as the value of R&D spend as a percentage share of sales, is as high as 25% for some big pharma companies. The hunt for future profit is intense by these largest companies looking for extension and expansion of their product pipeline. However, with an eye on the future expansion of their real estate need, it is the 73 pharma and biotech companies that have doubled their annual R&D spend in one year that look interesting. This will be a key driver of real estate demand as these companies have around 40,000 employees.

Moving back to the large corporates, with a CVC angle, it will be potentially positive for the real estate sector, in terms of demand, as the larger companies look to spend their large cash piles. For the top three, Pfizer, Johnson & Johnson and Roche, they have around US$80bn of 'cash on hand'. There is likely to be more M&A activity, as seen recently with the large pharmas piling into key areas. This includes the oncology drugs sector by Pfizer, AstraZeneca and Merck, but also obesity drugs, which will be a mega global issue in the next decade. The question here is whether there is likely to be more of this corporate cash feeding through to the earlier-stage companies as deployed by the CVC entities.

The big corporate VC-backed deals during the past five years include Moderna, Tempus and GRAIL, which are all companies to watch closely, not just for their scientific endeavour, but as significant acquirers of commercial real estate.

Other areas of funding that Savills are tracking include the global foundations, endowments and all other forms of philanthropic activities. Without the need for shorter-term financial returns, these are interesting organisations to track. Some are old organisations, some much newer, but they will enable the funding of companies to further scientific discovery. These funding entities may also grow the number of Focused-Research Organisations (FROs). An example of an FRO would be the Human Genome Project (HGP) that ran for 13 years. In that period, HGP delivered one of the most important scientific discoveries of all time. Would it have happened without the charitable investment, probably not. FROs will remain a key way forward to fund the new ideas, discovery, innovation and ultimately create new companies. Overall, there will continue to be a wide range of sources of funding that will continue to grow the life science market.

_{Read the articles within Spotlight: Life Sciences – Trends & Outlook below.}