Get Ready: U.S. Firm With Big Plans In UK Sees Growing Demand For Life Sciences Real Estate
For IQHQ’s Douglass Cuff, the appeal is obvious. While the office sector is wrestling with an existential crisis, in Boston, the largest life sciences real estate market in the U.S., the garden is rosy. He sees the same trends in the UK, and that is why he has big plans here.
“Get ready, because demand isn’t slowing,” Cuff, the vice president of UK Real Estate for IQHQ, said on Bisnow’s life sciences webinar. “In a 20M SF market in Boston, there is not one tenant that’s struggling, and companies are bringing their supply chain into the U.S. so they are not reliant on Asia. Because of that level of demand, you are seeing new entrants into the market. When I started 20 years ago, there were only two players, now there are more than 20 in Boston alone.”
IQHQ raised $775M for an unlisted REIT earlier this year and has already spent half of it on four deals in the U.S. Now, it is heading back out for more capital, having appointed investment bank Raymond James to seek a further $700M, according to React News. A big chunk of that will be spent in the UK, a market that Cuff predicted would see similar trends to the U.S.: demand driven by increasing investment in the knowledge economy, and a growing diversity of investors interested in the sector.
Other players in life sciences real estate spoke on the webinar about the balance between large and small tenants in a life sciences portfolio, the debt side of the financing equation, and the possibility of a UK life sciences REIT.
“At IQHQ, we’re a startup company, we’ve raised $775M, and we are attacking the life sciences clusters for speculative development,” Cuff said. So far it has two projects in Boston, one in nearby Andover and one in San Francisco.
“We’re strong, long-term believers in the sector, so we’re looking at development and redevelopment opportunities in those clusters," Cuff said. "In the UK, we are laser-focused on the tips of the golden triangle, so Oxford, Cambridge, London, and we are looking for projects where we can immediately get going and start and put a shovel in the ground as quickly as possible. Then, once this first round of assets is built and leased, we’ll then go public and be a very traditional REIT like [Nasdaq-listed] Alexandria, so we’ll be a long=term owner of the assets.
“We’re firm believers that in the UK it is only the beginning. Our focus is Cambridge, Oxford and London, but what Cambridge and Oxford have available is land, so there is space to build, unlike Cambridge, Massachusetts, where there is no space available, which is pushing the sector out of its traditional core.”
Another investor new to the UK sector this year is U.S. private equity firm Harrison Street, which bought a portfolio of five life sciences buildings across the UK in a joint venture with sector specialist Trinity Investment for £185M earlier this year.
Harrison Street European CEO Paul Bashir said the company had been drawn to the sector by the strong underlying demand for specialists life sciences property and is looking to invest more.
“We’re a needs-based investor,” Bashir said. “We invest in sectors with strong fundamentals, and here there is a continuing increase in demand for specialist space. It is specialist space, but you get a premium for it, and we have seen there is a lack of fit-for-purpose facilities — that supply and demand imbalance creates opportunities.
“We like this sector even more post-COVID than before. We think there will be compelling opportunities,” he added. “We are already starting to see dislocation within the sector, you are already starting to see supply chains being brought back domestically, so that will create more demand. And I think we’ll start to see regional dislocation, and we like the network opportunity across the UK, especially as the government starts to support the sector with grants and R&D funding.”
There are not many sectors of real estate where the government is providing funding for tenants, but life sciences is one of them, and this provides a key boost for the sector, according to one longtime UK incumbent.
“The government has an industrial strategy that has been promoting the knowledge economy since 2017 and which the current government is continuing,” Harwell Science and Innovation Campus Director Angus Horner said. Earlier this year, Brookfield paid £250M for a 50% stake in the 710-acre campus outside Oxford.
“Those of us who don’t have legacy issues and can pivot towards the knowledge economy will do well," Horner said. "Real estate operational expenditure as a fraction of the budget of fast-growing companies is tiny; the big part is talent, and that is what this sector needs to be focused on. Real estate needs to change its business model quite substantially. Follow talent and follow intellectual property creation, that’s where you want to be looking most closely and where you want to be investing. It's not about building a shiny building and putting a sign up.”
One of the key elements of life sciences real estate is finding the right balance between larger tenants on long leases and smaller companies with less established covenants. Real estate is a sector that has traditionally gravitated toward the longest leases possible, but in life sciences, that just doesn’t wash.
“You might not have long leases to big covenants, but having those smaller companies allows you to have shorter, more flexible leases, which allows you to drive up NOI if you manage it well,” Bashir said. “It’s about having a balance between long, stable, established tenants, and those smaller innovators that attract other tenants and allow you to create a hub. Part of creating alpha is about creating income growth by getting that balance right.”
“You might have a very small company that may not generate much revenue, but they might drive spend elsewhere, because they have a large grant that they spend with other companies,” Bruntwood SciTech chief executive Kath Mackay said. Bruntwood SciTech is the regional sciences property investor backed by L&G with ambitions to grow its portfolio to £1.8B.
As the sector evolves, early investors will start to look at the ownership structures for their portfolios over the long term. IQHQ has plans to list and become a REIT, combining its U.S. and UK portfolio, and the webinar audience heard there is the possibility of a dedicated UK REIT in the sector as well.
“I’ve had lots of conversations with people about the prospects for a UK life sciences REIT, and I think there are enough assets to do that,” Cuff said. "The issue is just getting them all together, and would people be willing to put their assets into that REIT?"
As is often the case in the UK, Bashir pointed out, it will all depend on who is willing to pay more for the assets: the public or private markets. In Europe, Oxford Properties is one of a number of institutions looking to get into the sector.
“For it to happen, the sector would need to evolve. We talked about the short-term income and weaker covenants: Certain assets will lend themselves towards a REIT, others won’t,” Bashir said. “So there will be some REIT options, and that would be one we would consider. We’re keen to aggregate a portfolio through Trinity first, and then we will look at exit options including a REIT, as we always do.”
Crucially on the financing side, lenders are also being drawn to the sector, as well as equity providers.
“In general, the sector is very bankable,” Bashir said. “I think a lot of traditional lenders look favourably on the space because of the strong fundamentals ... I think there is a lot of focus at the moment from lenders on the operators, not just the covenants, but who are the operators, how strong are they in managing the assets?”
In a world becoming ever-more complex, and where economies are increasingly driven by the ability to generate ideas and monetise them, life sciences real estate seems a decent bet. Prepare for more investors to follow IQHQ and Harrison Street across the Atlantic and into the market.